Question

Question 3 (a) Explain the three conditions held at the long-run equilibrium in a perfectly competitive market with a diagram. (10 marks) (b) If a firm makes zero economic profit, it will exit the market in the long run. Do you agree? Explain. (7 marks) (c) What makes a firm become a natural monopolist, and how does it become a barrier to entry of new firms? Explain. (8 marks)

Answer 1

1) In a perfectly competitive market the long-run equilibrium point occurs where:

-- the marginal cost (MC) curve intersects the demand curve (price)

-- the point at minimum of the average cost (AC) curve.

-- Price = Minimum Average Cost = Marginal Cost = Marginal Revenue

Graph enclosed

2) Disagreed with the statement. In the long-run, the economic profits will be zero. If a firm makes zero economic profit it can continue to operate. It can continue to operate in the short run, if it is covering its variable costs. When economic profit is negative from operating, the firm shuts down when the loss from operating exceeds total fixed cost; or total revenue is lesser than total variable cost; or price is lesser than average variable cost; average revenue is lesser than average variable cost at all output levels

3) There are two types of monopoly, based on the barriers type for entry they exploit. One is natural monopoly, where the barriers to entry are something other than legal prohibition; and second is legal monopoly, where government prohibit competition. A natural monopoly is a distinct type of monopoly that creates a barrier for new entrants as occurs when there are extremely high fixed costs of distribution, unique raw materials, technology or other almost similar factors.

GRAPH SPrice ATC ELRAC MR Market Price P=MR = MC = ATC = minimum LRAC, Quantity Long-run Equilibrium for a Perfectly Competitive Firm