Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

204 PRICE AND OUTPUT UNDER PERFECT COMPETITION [CHAP. 8
(a)
(b)
(c)
The sequence of events when the commodity price rises in Problem 8.13(a) is as follows: As the commodity
price rises, each firm (and the industry) expands output, the demands for factors increase, factor prices rise,
and the MC curve of each firm shifts up and to the left so that the expansion in the output of each firm
(and of the industry) is less than in the absence of the increases in factor prices.
Since we are dealing with the short run and the number of firms cannot increase, in order for the industry
output to rise (thus causing factor prices to rise), the output of each of the identical firms must rise (i.e.,
point B 0 in Fig. 8-17 must be to the right of point C). The exact opposite occurs if factor prices fall as the
industry output is expanded. If some factor prices rise and some fall, the MC curve may shift up or down
and the shape of the MC curve is also likely to change.
In times of cost-push inflation, the higher prices of variable inputs lead to higher commodity prices, reduced
commodity outputs, and the reduced employment of the variable inputs.
LONG-RUN EQUILIBRIUM OF THE FIRM
8.15 In Fig. 8-18, suppose that the perfectly competitive firm has a scale of plant indicated by SAC 1 and the
short-run market equilibrium price is $16. (a) What output will this firm produce and sell in the short
run? Is the firm making a profit or a loss at this level of output? (b) Discuss the adjustment process for
this firm in the long run, if only this firm and no other firm in the industry adjusted to the long run.
Fig. 8-18
(a)
(b)
The best, or optimum, level of output for this firm in the short run is given by the point where P ¼ SMC 1 .At
this level of output (400 units), the firm is making a profit per unit of $4 and total profits of $1600.
If only this firm adjusts to the long run (a simplifying and unrealistic assumption for a perfectly competitive
market), this firm will produce where P ¼ SMC 3 ¼ LMC, and SMC 3 and LMC are both rising. The firm will
build the scale of plant indicated by SAC 3 and will produce and sell 800 units of output. The firm will make a
profit per unit of $5 and total profits of $4000 per time period. Note that since we are dealing with a perfectly
competitive firm, we can safely assume that if only this firm expanded its output, the effect on the market
equilibrium price will be imperceptible and we can retain the price of $16 per unit.
8.16 (a) Discuss the long-run adjustment process for the firm and the industry of Problem 8.15 (b) What
implicit assumption about factor prices was made in the solution of part (a)?
(a)
In the long run, all the firms in the industry will adjust their scale of plant and their level of output and more
firms will enter the industry, attracted by the short-run pure economic profits. This will increase the industry
supply of the commodity and thus cause a fall in the market equilibrium price to $8 (see Fig. 8-18). At this
price, P ¼ MR 2 ¼ SMC ¼ LMC ¼ SAC ¼ LAC. Each firm produces 500 units of output (if they all have
the same cost curves) and receives only a “normal return” (equal to the implicit opportunity cost) on its