Questions: Competitive Industry Long-Run Equilibrium
3 questions to test your understanding
Score: 0 / 3
Question 1 Short Answer
A competitive industry is in short-run equilibrium with firms earning positive economic profit. Trace the long-run adjustment.
Think about your answer, then reveal below.
Model answer: Positive profit attracts entry. New firms shift the industry supply curve right, pushing price down. Entry continues until price falls to the minimum of LRAC, at which point economic profit equals zero and entry stops.
The entry/exit mechanism is the engine of long-run adjustment. Notice that the short-run supply curve shifts during this process (more firms), but each individual firm moves along its own cost curves.
Question 2 Multiple Choice
In long-run competitive equilibrium, which conditions hold simultaneously?
AP = MC only
BP = ATC only
CP = MC = ATC = minimum LRAC
DP = MC and P > ATC
All three coincide at the long-run equilibrium. P = MC is the profit-maximizing output rule. P = ATC is the zero-profit condition. The minimum of LRAC is where both can hold simultaneously — this is productive efficiency.
Question 3 Short Answer
Why is the long-run supply curve of a constant-cost industry perfectly horizontal?
Think about your answer, then reveal below.
Model answer: Because input prices don't change as the industry expands, every firm always faces the same cost curves. The zero-profit condition is always restored at the same minimum LRAC, regardless of how many firms enter. So price returns to the same level in the long run no matter how much demand increases.
The horizontal long-run supply is a consequence of constant input prices plus free entry — not a special assumption about technology. It implies that in the very long run, competitive markets supply any quantity consumers demand at the same price.