Question

State the three regions of the long run average cost curve. Indicate what happens to the cost in each region.

How is it determined for pure competition and monopolistic competition whether the firm is operating in the short-run or the long-run?

Answer 1

1) Long run average cost curve is U shaped curve. First It slopes downward which is first phase. Than it becomes flat, which is second phase and than it slopes upward which is third phase.

In all three phases total cost increases but rate of increase in total cost will be different. In first phase total cost increases at decreasing rate thats why average cost is declining in this phase. in second phase when curve is flat total cost increases at constant rate so average cost is also constant. In third phase total cost increases at increasing rate and average cost is also increasing here.

2) For pure competition firm in short run may earn economic profit, economic loss or normal profits. But in long run firm will earn only normal profit. It will operate at minimum of average total cost curve in long run.

In monopolistic competition also firms could earn econoic profit, economic losses or normal profit in short run, but in long run firm will only earn normal profit and in long run firm's downward slope of ATC will be tangent to demand curve and price is same as ATC. So in long run price and ATC will be same.

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