Choosing output in long run, Microeconomics

Choosing Output in Long Run

* In long run, a firm can change all its inputs, including size of the plant.

* We are taking free entry and free exit.

2171_output in long run.png

681_output in long run1.png

* Accounting Profit and Economic Profit

- Accounting profit (π) = R - wL

- Economic profit (π) = R - wL - rK

  • wL = labor cost
  • rk = opportunity cost of capital

* Long Run Competitive Equilibrium

- Zero-Profit

  • If R > wL + rk, the economic profits are positive
  • If R = wL + rk, zero economic profits, but firms is earning normal rate of return; showing that the industry is competitive
  • If R < wl + rk, consider going out of the business

- Entry and Exit

• The long run response to short run profits is to increase profits and output.

  • Profits will attract the other producers.
  • More producers increase the supply of industry that lowers market price.

       1084_output in long run2.png

Long Run Competitive Equilibrium

* Long Run Competitive Equilibrium

 1)  MC = MR 

 2) P = LAC

  • No incentive to enter or leave
  • Profit = 0

  3) Equilibrium Market Price

* Questions

 1) Explain market adjustment when P < LAC and firms are having identical costs.

 2) Explain market adjustment when firms are having different costs.

 3) What is opportunity cost of land? 

Posted Date: 10/12/2012 5:42:40 AM | Location : United States







Related Discussions:- Choosing output in long run, Assignment Help, Ask Question on Choosing output in long run, Get Answer, Expert's Help, Choosing output in long run Discussions

Write discussion on Choosing output in long run
Your posts are moderated
Related Questions
a monopolist faces a demand curve Qd- 120-2p and has costs given by C(Q)=20Q+100 (marginal cost is constant at $20) a. What is the optimal Price and Quantity for this monopolist?

Determinants of Private Demand for Education Rates of return on investment in education is only one of the factors determining the demand for private investment though it is

what is the law of diminishing marginal product? explanation with the help of proper schedule and diagram.

explain the traditional theory of cost with suitable diagrams.explain why LAC curve is not U shaped?

What types of questions would concern microeconomics, versus macroeconomics? Microeconomics concerns itself with decision-making of individual consumers, firms  and other organ

In year one, suppose the federal government has no national debt and spends $100 billion, while raising only $50 billion in taxes. The U.S. Treasury will issue $ billion of governm

Reasons for International Trade?



Suppose that Congress increases the minimum wage to $10 an hour. a. Use a supply and demand model for unskilled labor to show the effect on the number of unskilled workers employed