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Problem on long run competitive equilibrium

The technology is such that LAC is minimized at firm’s output equivalent to 10 and minimum LAC is Rs. 15. Assume that the demand schedule for the product is given as shown:

2207_table price.jpg

(i) Determine total quantity sold in market and how many firms will operate in long run competitive equilibrium?

(ii) Assume that because of technological development the LAC curve shifts down in such a way that the minimum average cost is equivalent to Rs. 12 and it takes place at output level 8. Determine how many firms will now operate in the market in long run?

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Answer:

Long run equilibrium takes place if: AC = AR

Initially, AC is given as = Rs. 15

(At equilibrium condition, Quantity demanded = Quantity sold)

If P = AC = Rs. 15: Quantity Sold = 1200 units

If each firm is producing 10 units. Then no. of firms = 1200/10=120

If AC = Rs. 12

Then price (AR) = AC = Rs. 12, Quantity Sold= 1440 units.

If each firm is generating 8 units, Then no. of firms =1440/8 = 180

(i) Before change in technology: Quantity Sold = 1200 units and No. of firms = 120

(ii) After change in technology: Quantity Sold = 1440 units and No. of firms = 180

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