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Difficulty: EasyPerfect Competition: Price and Output Determination in Short and Long Run

In the long-run equilibrium of a perfectly competitive market, individual firms earn only normal profits. Which of the following conditions correctly describes this long-run equilibrium position for a price-taking firm?

  1. Price = Marginal Revenue = Marginal Cost = Average Total CostAnswer
  2. B
    Price = Marginal Revenue = Total Revenue
  3. C
    Price = Average Variable Cost with Marginal Cost at its minimum point
  4. D
    Price exceeds Marginal Cost while Marginal Cost equals Total Cost

Answer

The long-run equilibrium condition for a perfectly competitive firm is Price = Marginal Revenue = Marginal Cost = Average Total Cost.
In the long run under perfect competition, market entry and exit drive price to equality with the minimum average total cost. Because competitive firms face a perfectly elastic demand curve where price equals marginal revenue, profit maximization occurs where Price = Marginal Revenue = Marginal Cost = Average Total Cost, yielding zero economic (normal) profit.

Step-by-Step Solution

1
Identify the short-run profit maximization condition for a competitive firm.
The firm operates where Price (PP) = Marginal Revenue (MRMR) = Marginal Cost (MCMC).
As a price taker, P=MRP = MR, and profit maximization occurs where MR=MCMR = MC.
2
Determine the long-run adjustment mechanism in perfect competition.
Free entry of new firms eliminates short-run economic profits, while exit eliminates economic losses.
Market supply shifts until price equals minimum Average Total Cost (ATCATC).
3
Combine the conditions to state the full long-run equilibrium equality.
P=MR=MC=minimum ATCP = MR = MC = \text{minimum } ATC.
At this point, firms earn zero economic profit (normal profit) and have no incentive to enter or leave the industry.

Key Concept

Long-run equilibrium in perfect competition requires firms to produce at minimum average total cost where price equals marginal cost, earning only normal profit.
Estimated Time:45s
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Topics

Perfect Competition: Price and Output Determination in Short and Long Run

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