APCI 2 10 20 30 40 Quantity per Day The graph above represen

APCI $2 10 20 30 40 Quantity per Day The graph above represents a firm in a perfectly competitive industry. Assuming the price is $5 in the short run, which of the following will occur in the long run. New firms will enter the industry The firm will end up just breaking even (economic profit is zero). The industry supply of this produce will increase. The long-run equilibrium price will be $3. All of the above will occur in the long run. ed

Solution

Price (P) is $5 in the short run. Since price = MC in the perfect competition, each firm will produce 20 units of output (Q). At Q=20, P=MC=$5.

Now At Q=20, P=$5 is greater than ATC. As a result, each firm will ean supernormal profits (greater than 0), So, in the long run, these supernormal profits will give incentive other firms to enter this industry so that they could also earn higher profits. Due to entry of new firms, production would increase and as a result, industry supply would increase. So increase in supply would reduce the equilibrium price in the market till the point where firms earn normal profits (0 profits). Industry supply would increase till long run equilibrium price equals $3. When P=$3, ATC is also $3. So profits will be 0.

All of the above will occur in the long run.