Suppose all firms in a perfectly competitive market are in long-run equilibrium. Illustrate what a perfectly...

Suppose all firms in a perfectly competitive market are in long-run equilibrium. Illustrate what a perfectly competitive firm will do if market demand rises.

Expert Solution

If all the firm are in a long run equilibrium they are breaking even, if the demand rises at this point the price will rise and the firm will produce more at this increased price this will increase the profit of the firms, At a higher profit more and more firms will be attracted towards the market and start operation. it will continue to the point where the market is at long run equilibrium again and the new output will be higher than before and the price will be lower than before.

Here, the firm was producing at the point where the MC and the price was equal. it was also the lowest point of the ATC suggesting a long run equilibrium, After the increase in the demand the price will rise and at a higher price the firm will produce at the point where the higher price i.e. $30 and the MC meet, that is a the output level of 70.

Rahul Sunny answered 1 year ago

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