Question

(a) Draw a figure to scale showing the short-run and long-run equilibrium of the firm on...

(a) Draw a figure to scale showing the short-run and long-run equilibrium of the firm on the assumption that the firm, but not the industry, has transitioned to their long-run equilibrium (that is, after changing their plant size but before entry/exit of other firms). Use the following information to piece it together: P = \$30; the least-cost input combination of producing q = 2 costs \$60; the minimum efficient scale is at q = 8, with LAC = \$12.50 at that point; the firm’s long-run profit-maximizing level of output is q = 10; LAC = \$15 with LMC = \$30 when the firm (but not the industry) is in its long-run equilibrium.

(b) Sketch a (new) figure for this firm showing their long-run equilibrium when the industry is also in long-run equilibrium (that is, after all entry/exit has taken place). What will be the price and quantity of each firm (q)? Label these on your figure.

(c) Based on part (b), what will be the total market quantity (Q) if there are 125 identical firms? Sketch the market supply and demand graph and label the market price and quantity.

In short-run, a monopolistically competitive firm is in equilibrium or is maximizing profit when it produce that level of output at which marginal cost (MC) equals marginal revenue (MR).

In long-run, a monopolistically competitive firm is in equilibrium or is maximzing profit when it produce that level of output at which following two conditions are met.

1. Marginal cost (MC) equals Marginal revenue (MR)

2. Price (P) equals Average total cost (ATC)

So, if MR = MC and P = ATC for a monopolistically competitive firm then the firm is in long-run equilibrium.