Question

Suppose rice market reaches long-run equilibrium.

a. At equilibrium, what is the economic profit for each firm? Can the individual firms produce at minimum average total cost and make maximum economic profits? Explain your answer with a diagram.

b. If the demand for rice increases. Explain what will happen to the market equilibrium and the profit of individual firms in the short run and long run. Explain your answer with illustrations.

Answer 1

A)

A single firm's profit is shown by the shaded area. Entry continues until firms in the industry are operating at the lowest point on their respective average total cost curves and economic profits fall to zero.  

B)

In the short run as demand for rice increases, the market eqilibrium price of rice increases. This leads to short run economic profits as shown in the figure below:

In the long run the economic profits are again eliminated becasue of entry of new firms , this shifts the supply curve and price again reach the minimum point of ATC. Therefore zero economic profits in the long run.

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