Chapter 60, Problem 2FRQ

To determine

Graph showing the impact of the decrease in demand in an increasing cost industry in a perfectly competitive firm in long run.

Explanation of Solution

  

In the above diagram, point A shows the initial equilibrium in both the short run and long run. A decrease in demand for paper would shift the demand curve leftward which led to a decrease in price and quantity in the short run. Therefore, short-run supply falls that shift supply curve to the leftward. As a result, price increases and attain a new equilibrium where both the short-run supply curve and long run supply curve intersect the demand curve.

The new representative firm’s average total cost would be different because of the reduction in average variable cost due to fall in price and wage rate.

Economics Concept Introduction

Introduction:

A perfectly competitive firm’s average total cost curve and average variable cost curve are U-shaped, and the price line is horizontal which means the firm can sell as much as output at a given price. The firm attains equilibrium at the intersection of the average total cost curve, marginal cost curve, and marginal revenue curve (Price line). Short-run equilibrium is determined at the intersection of the short sun supply curve and demand curve and long-run equilibrium is determined at the intersection of the long run supply curve and demand curve.