b) Use the MR, MC, and ATC curves along with supply and demand to show how profits will go to zero in the long run. Graph profits, losses, and a point where profit equals zero (Don’t forget get what MR is in perfect competition)
Explain in detail why economic profits are zero in the long run in the
a) Explain the difference between economic profits and accounting profits.
b) Use the MR, MC, and
c)Accompany your graphs with a story of a fictitious business.
d) Thought Question – What would happen the PC model if one seller figured out a new cheaper production method? (There may be more than one correct answer to this question)
Please answer b
Solution:
Perfect Competition: It refers to the market situation in which there are large number of buyers and sellers exist to deal in homogenous goods.
In the long run a perfect competitive firm earns zero economic profit due to freedom of exit an entry of firms. In the long-run firm earns normal profit. AR=MR. In long-run average cost curve and marginal cost curve exists.
The equilibrium point is where, MR=MC and MC cuts MR from below. When AC=AR the firm earns normal profit.
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