) Explain any two of the following statements with economic reasoning and appropriate diagram(s) a. A...

) Explain any two of the following statements with economic reasoning and appropriate diagram(s) a. A competitive firm’s supply curve in the short-run is a segment of MC curve. b. The long-run equilibrium of a perfectly competitive firm is both productively and allocatively efficient. c. A marginal revenue curve of a monopolist lies below the demand curve

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Expert Solution

a)

The supply curve for a competitive firm in the short run is that segment of the marginal cost curve that is above the minimum AVC. The shutdown point is the minimum point on the AVC. Below the shutdown point, the firm is better off shutting down. A firm will supply as long as its minimum AVC is covered.

b)

In the long run, a competitive firm is in equilibrium when MR=MC=AC. It will produce that output where LMC=LAC. Because if P is less than AC, the firm is suffering a loss.

Long term equilibrium of the perfectly competitive firm promotes allocative and productive efficiency. Allocative efficiency because P=MC. Price is the willingness to pay by a consumer, which is the social benefit. MC is the cost to the producer, which is the social cost of producing the good. Allocative efficiency occurs when social benefit equals social cost. Allocative efficiency means that resources are used most efficiently in an economy.

Productive efficiency occurs in perfect competition, because P=minimum ATC. This means the goods are produced at the lowest cost. When a firm is producing at the lowest minimum ATC then the firm is earning normal profits. If P> minimum ATC, then firm is making economic profit and other firms will enter the industry. If P< minimum ATC, then the firm is incurring a loss in the long run. Firms will exit the industry.

Rahul Sunny answered 8 months ago

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