Explain why the long-run product price for a perfectly competitive firm will equal its minimum average...

Explain why the long-run product price for a perfectly competitive firm will equal its minimum average total cost?

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Expert Solution

In the long run, firm in the competitive market will produce at a point where the average cost is minimum. If the firm is producing at a point where the average cost is falling it will increase its production where the firm is no longer facing a declining average cost. If the firm is producing at a point where the Average cost s increasing then the firm will decrease its production and reach a point where the average cost is minimum.

In the long run, the price is set at this point because at this point the firm is breaking even i.e. no loss and no profit and the firm can produce as many goods they can at this point without making any profit or loss. If the price is higher it means the firm is making a profit and it will attract more firm in the market and the price will come down and if they are selling at below the lowest point of Average cost curve frim will exit the market and the price will rise.

Rahul Sunny answered 2 years ago

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