Question

1.Discuss the different types of industries can exist in the long-run. Please also elaborate your answer with suitable graphs.

2.Using the Marginal Revenue and Marginal Cost method, explain where should a firm produce. Support your answer with suitable graphs to show the short run profit and loss.

3.Discuss in details the relationship between short run and long run average cost curves. Support your answer with suitable graphs.

Answer 1

1) Following are the industries that can exist in long-run

a) Constant-cost Industry

For a constant cost industry, whenever there is an increase in market demand and price, the supply curve shifts to the right. In this type of industry, the supply curve is very elastic.

b) Increasing-cost Industry

In an increasing cost industry, as the market expands, the old and new firms experience increases in their cost of production, which makes the new zero-level intersect at a higher price than before.

c) Decreasing-cost Industry

For a decreasing cost industry, as the market expands, the old and new firms experience lower costs of production, which makes the new zero-profit level intersect than before.

2). Firm should produce where marginal revenue equals marginal cost.

When marginals revenue exceeds marginal cost, the firm can earn greater profit

When marginal cost exceeds marginal revenue, the firm suffers loss.

3) In the short run average cost curve falls in the beginning, reaches a maximum and then begins to rise.Short run average cost curve is U-shaped. Long run average cost curve is also U-shaped.

Long run average cost curve is the sum total of short run curves.