Intermediate Microeconomics · free preview
Long-Run Exit and Zero Profit
In the long run fixed costs become avoidable and the firm exits below the ATC minimum, 17 in the worked case, entry competing profits away so that long-run equilibrium prices sit at minimum average cost with zero economic profit, a normal return on capital included in cost.
1. The horizon switches the comparison
The horizon switches the comparison
2. Entry competes profits away
Entry competes profits away
3. The long-run supply curve
The long-run supply curve
4. The competitive model completed
The competitive model completed
5. The exit threshold
What is the long-run exit price for the worked cubic firm?
6. Zero profit's meaning
What does zero economic profit in long-run equilibrium mean?
7. Entry dynamics
Price sits above min ATC. What happens over time?
8. Long-run supply shape
What does long-run industry supply look like under free entry with constant costs?
9. The gap between thresholds
Subtract the shutdown price 7 from the exit price 17, and write the number.
10. Supply at the break-even price
At price 17, supply solves MC equals 17 on the rising branch. Compute 2 plus root of 17 minus 4 over 3, and write it to two decimals.
11. Profit at the exit threshold
At p of 17, near the efficient scale q of 4.08, what profit does the firm earn?
12. The in-between band
A price of 12 sits between the shutdown price 7 and the exit price 17. What does the firm do?
13. A price above the exit line
The price is 19, above the exit threshold 17. What happens over time?
14. No fixed cost, one threshold
Suppose the technology had no fixed cost at all. Where would exit and shutdown coincide?
15. Supply at nineteen
Using q equals 2 plus root of p minus 4 over 3, compute supply at p of 19, and write the number to two decimals.
16. Revenue at the zero-profit point
At p of 17 with quantity 4.08, compute revenue, and write the number to one decimal.
Practice this interactively
Free account · instant grading · spaced review that schedules itself.
Start this course for free