Question

1. Is it possible for a firm in pure competition to make short run and long-run economic profits. Briefly explain why or why not.

2. Assume that labor accounts for 85% of total production costs in Industry “X”. Would the demand for labor be relatively elastic or inelastic
in this industry. Please briefly explain.

Answer 1

1.
A firm in pure competition can earn an economic profit in the short run, but in the long run, economic profit will be zero in pure competition. In short run, firms get price that is higher than the ATC, so earning economic profit in the short run, Though, it does not happen in the long run, because when other firms see one firm gaining positive economic profit, then they enter the industry and supply in the industry increases. It reduces the profit margin and at long run equilibrium, price becomes equal to average total cost. It makes economic profit to be zero and long run equilibrium is achieved.
2.
Demand for labor will be relatively inelastic, because the industry is labor intensive and firms cannot operate without labor. So, they will pay wages that are demanded by the workers to continue the operations. It makes labor demand to inelastic demand.