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

CHAP. 8] PRICE AND OUTPUT UNDER PERFECT COMPETITION 205
(b)
owned factors. If firms were making short-run losses to begin with, the exact opposite would occur. In any
event, when all firms are in long-run equilibrium, they all produce at the lowest point on their LAC curve,
they all just break even, and they spend little if anything on sales promotion.
In the solution to part (a), the implicit assumption was made that factor prices remained unchanged as more
firms entered the industry and industry output was expanded.
8.17 (a) If each firm is in long-run equilibrium, need the industry also be in long-run equilibrium? (b) If the
firm and the industry are in long-run equilibrium, need they also be in short-run equilibrium? (c) Discuss
some of the efficiency implications of a perfectly competitive industry when in long-run equilibrium.
(a)
(b)
(c)
If the industry is in long-run equilibrium, then each firm in the industry must also be in long-run equilibrium.
However, the reverse is not true [compare the answer to Problem 8.15(b) with the answer to Problem 8.16(a)].
If the firm and the industry are in long-run equilibrium, they must also be in short-run equilibrium. However,
the reverse is not true [compare the answer to Problem 8.16(a) with the answer to Problem 8.15(a)].
Since each firm in a perfectly competitive industry produces where P ¼ LMC (provided that P is equal to or
greater than LAC) when in long-run equilibrium, there is an optimal allocation of resources to the industry
(more will be said on this in subsequent chapters). Also, since each firm produces at the lowest point on its
LAC curve and makes zero profits in the long run, consumers get this commodity at the lowest possible
price. For these reasons, perfect competition is regarded as the most efficient form of market organization
in industries where it can exist. Our antitrust laws aim at maintaining a healthy degree of “workable
competition” in industries where perfect competition cannot exist. In subsequent chapters, we will measure
the efficiency of other forms of market organization by comparing them to the perfectly competitive model.
8.18 Must all firms in a perfectly competitive industry have the same cost curves so that when the industry is
in long-run equilibrium, they will all just break even? Explain.
Most economists would answer this question in the affirmative. If some firms appear to have lower costs than
other firms, this is due to the fact that they use superior resources or inputs such as more fertile land or superior
management. These superior resources, under the threat of leaving to work for other firms, can extract from the
firms using them the higher price or return commensurate with their greater productivity. In any event, the firm
should price all resources it owns, and the forces of competition will force the firm to price all resources it does
not own at their opportunity cost. So it is the owners of such superior resources who receive the benefit (in the
form of higher prices or returns) from their greater productivity rather than the firms employing them (in the
form of lower costs). This results in all firms having identical cost curves. Therefore, all firms just break even
when the perfectly competitive industry is in long-run equilibrium.
CONSTANT, INCREASING, AND DECREASING COST INDUSTRIES
8.19 Assume that (1) the lowest point on the LAC curve of each of the many identical firms in a perfectly
competitive industry is $4 and it occurs at the output of 500 units, (2) when the optimum scale of
plant is operated to produce 600 units of output per unit of time, the SAC of each firm is $4.50, and
(3) the market demand and supply functions are given respectively by QD ¼ 70,000 2 5000P and
QS ¼ 40,000 þ 2500P. (a) Find the market equilibrium price. Is the industry in short-run or long-run
equilibrium? Why? (b) How many firms are in this industry when in long-run equilibrium? (c) If
the market demand function shifts to QD 0 ¼ 10,000 2 5000P, find the new short-run equilibrium
price and quantity for the industry and the firm. Are firms making profits or losses at this new
equilibrium point?
(a) The market demand and supply functions are those of Problem 8.5. Thus the market equilibrium price is $4
(see Problem 8.5). Since this price is equal to the lowest LAC for each firm in the industry (assumption 1
above), all firms in the industry, and the industry itself, are in long-run equilibrium at this price.
(b) In order to find the number of firms in this industry, we must find the market equilibrium quantity. This is
obtained by substituting the equilibrium price of $4 into either the market demand function or the market