Question

Suppose there are 1000 firms in the perfectly competitive shrimp industry. All firms are operating at their most efficient scale (i.e., they have expanded to take advantage of any economies of scale). All firms have the same technology and costs. All firms are producing the quantity that maximizes profit. Each firm produces 3000 pounds of shrimp a year and has average total cost (ATC) of $13 per pound. The market price of shrimp the firms receive is $10 per pound.

a. (2 pts) Is a typical firm making a profit or a loss?  

b. (2 pts) How much is the profit or a loss? Show your calculation.  

c. (10 pts) Starting from the current situation, explain what will happen to get this industry to a long run competitive equilibrium and why these changes will happen. To do this list each step of the logical progression with bullet points making sure to state cause and effect in correct order. Include what stops the process at long run equilibrium

Answer 1

a) a typical frim is making a loss , since the atc is greater than market price . that $13 > $10.

b) profit = TR - TC = ( 3000 *10) - ( 3000 - 13)

profit = 30000 - 39000

profit = -$9000 ( loss)

c) To get this industry to a long run , many firm will exit the industry because since firms is having losses . when the firm is exit the industry , the supply for shrimps decreased in the market, as the result the market price for shrimp will increase .

this process will stop in the long run , when the price is equal to the ATC and firm is earning zero economic profit and loss. this is the situation which economst called a long run equilbruim in perfect comeptitive market.