Question

1. How are the firms profit maximizing output and price determined in the short run? long run?

2. Are the firms demand curve and the industrys demand curve the same? why or why not?

3. What are the relationships among the different average costs and marginal costs in the short run and long run?

4. How are firms supply and the industrys supply curves determined in the short and long run?

Answer 1

Answer 1: Short Run : A firm maximizes its profits by choosing to supply the level of output where its marginal revenue equals its marginal cost. When marginal revenue exceeds marginal cost, the firm can earn greater profits by increasing its output. In the short‐run, the amount of capital the firm uses is fixed at 1 unit.

Long Run: The profit maximizing level of output, where marginal cost equals marginal revenue, results in an equilibrium quantity of Q units of output. Because the firm's average total costs per unit equal the firm's marginal revenue per unit, the firm is earning zero economic profits.

Answer 2: Yes, the firms demand curve and the industrys demand curve the same because the average revenue curve is also the demand curve since the average revenue is equal to price per unit of output sold. Hence, industry demand curve is the average revenue curve of the firm in a monopoly market.

Answer3: Analysis of short run and long run average cost: Short run average costs vary in relation to the quantity of goods being produced. Long run average cost includes the variation of quantities used for all inputs necessary for production. When the average cost declines, the marginal cost is less than the average cost.When the average cost increases, the marginal cost is greater than the average cost. When the average cost stays the same the marginal cost equals the average cost.

Answer 4:

Short Run Supply Curve of a Firm: Short run is a period in which supply can be changed by changing only the variable factors, fixed factors remaining the same. That way, if the firm shuts down, it has to bear fixed costs. That is why in the short run, the firm will supply commodity till price is either greater or equal to average variable cost. Thus a firm will continue supplying the commodity till marginal cost is equal to price or average revenue. Under perfect competition average revenue is equal to marginal revenue, so the firm will produce up to that point where marginal revenue and marginal cost are equal. Short run supply curve of a perfectly competitive firm is that portion of marginal cost curve which is above average variable cost curve.

Long Run Supply Curve of a Firm: Long run is a period in which supply can be changed by changing all the factors of production. There is no distinction between fixed and variable factors. In the long run, firm produces only at minimum average cost. In this situation, long run marginal cost, marginal revenue, average revenue and long run average cost are equal i.e., LMCMR (= AR)LAC (minimum). The firm is enjoying only normal profits. So that position of marginal cost curve will determine the supply curve which is above the minimum average variable cost. The point where minimum average cost is equal to marginal cost is called optimum production. Thus Long Run Supply Curve of a firm is that portion of its marginal cost curve that lies above the minimum point of the average cost curve.