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Firm ‘A’ is operating under the condition of perfectly competitive market. Whether rm ‘A’ is capable of maintaining abnormal profit in the long run? Why?Hint: Long run equilibrium of a rm under perfect competition. |
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Answer» Yes, I do agree to the statement that a rm cannot make super normal profit in the long run under perfect competition. This is because; freedom of entry will prevent super normal profit in the long run. We first determine the firm’s profit maximizing output level when the market price is greater than or equal to the minimum (long run) AC. This done, we determine the rm’s profit maximizing output level when the market price is less than the minimum (long run) AC. Case 1: Price greater than or equal to the minimum LRAC Case 2: Price less than the minimum LRAC Combining cases 1 and 2, we reach an important conclusion. A rm’s long run supply curve is the rising part of the LRMC curve from and above the minimum LRAC together with zero output for all prices less than the minimum LRAC. |
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