Long-Run Equilibrium in Perfectly Competitive Markets

The long-run marginal cost schedule is the perfectly competitive firm’s supply curve.

The firm’s demand schedule is the same as the firm’s marginal revenue and average revenue. The demand curve is perfectly elastic.

[Practice Problems] The demand schedule in a perfectly competitive market is given by P = 93 –

1.5Q (for Q ≤ 62) and the long-run cost structure of each company is:

Total cost: 256 + 2Q + 4Q²

Average cost: 256/Q + 2 + 4Q

Marginal cost: 2 + 8Q

New companies will enter the market at any price greater than: A. 8.             B. 66.    C. 81.

[Solutions] B

The long-run competitive equilibrium occurs where MC=AC = P for each company. Equating MC and AC implies 2 + 8Q=256/Q + 2 + 4Q. Solving for Q gives Q=8. Equating MC with price gives P=2 + 8Q=66. Any price above 66 yields an economic profit because P=MC > AC, so new companies will enter the market.