CFA Practice Question

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CFA Practice Question

Refer to the graph below. Assuming that the industry continues to operate under conditions of perfect competition and that the cost curves do not shift, in the long run each firm will produce ______.

A. 800 units of output
B. 1000 units of output
C. 1200 units of output
Correct Answer: A

Zero profits for the industry will exist only if output is 800 units in the long run.

User Contributed Comments 15

User Comment
cbb1 In the short-run, Price equals the intersection of MC (Marginal Cost) and MR (Marginal Revenue), but in the long-run, Price equals the intersection of Marginal Cost and Average Total Cost.
yanpz Why it's not 1000 units, when MC = MR?
yanpz because in long-term equilibrium, P=MC=ATC
Done Another way to look at it is since the companies are under perfect competition, they are waiting for some to leave the market which will allow supply to fall and the ability to raise prices.
danlan In this graph, P=60 > 50 ,if 60 is for short term and 50 is for long term, then price will fall?
mtcfa Yes price will fall. Done has it backwards. Since in the short run MR > MC , more firms will enter the market, increase the supply thus bringing down the price, and thereby eliminating economic profits. The long run equilibrium will therefore be at P=MC=ATC.
magicchip mtcfa hits the nail on the head!!
emongeca7 Always remember that individual companies will always produce the same 'cause they want to maximize profit. The output for the industry will be higher or lower due to the entry/exit of firms.
bundy Perfect Comp in LR means zero economic profit
gill15 MTCFA has almost nailed it. Short run P=MR=MC which is greater the SRATC and therefor Econ profit ----> More firms enter and the rest MTCFA has correct as well....
sgossett86 Gill U got EGO man... Are you looking to be a portf mgr? Hedge fund mgr?
Shaan23 Gills comments are pretty sweet. He's clarified a lot of things.
Bududeen All of the above approach are incorrect. Since in a perfect competition firms produced in the short run at P=MR =MC ... Thus the qty is 1000 units. But at this point firms are not producing at the minimum SRAC ... And MC >ATC... This implies that diminishing returns has set in.... The firms are making profits but not maximum profits. Since the extra output produced are detracting from total revenue.... That is the firms are producing at the point at which SRATC is upward sloping. This is an inefficient scale of production can be seen from the nature of the cost curves.. The firms are in an increasing-cost industry... Meaning that increasing output leads to increasing price not fall in price...
Bududeen Thus for the firms to maximize profit they will reduce output in order to reduce cost and eventually leading to a reduce price as the supply curve is upward sloping ... A reduction in output should lead to a reduction in price... I.e. A movement along the supply curve not a shift in the supply curve.... Thus in the long run the firms will produce 800 units and attain maximum profits at the point at which MC is now exactly = ATC and also equals to the minimum point of the LRATC and the corresponding SRATC...
schweitzdm Thanks for the explanation Budu.
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