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What are the conditions for the long run equilibrium of the competitive firm?
- a)LMC = LAC = P
- b)SMC=SAC=LMC
- c)P=MR
- d)All of these
Correct answer is option 'A'. Can you explain this answer?
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What are the conditions for the long run equilibrium of the competitiv...
Condition for Long Run Equilibrium of a Firm. For a firm to achieve long run equilibrium, the marginal cost must be equal to the price and the long run average cost. That is, LMC = LAC = P. The firm adjusts the size of its plant to produce a level of output at which the LAC is minimum.
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What are the conditions for the long run equilibrium of the competitiv...
Conditions for long run equilibrium of the competitive firm:
1. LMC = LAC
In the long run, a competitive firm will produce at the point where long run marginal cost (LMC) is equal to long run average cost (LAC). This means that the firm is producing at the minimum efficient scale and there are no economies of scale left to be gained.
2. LMC = P
The competitive firm will sell its output at the market price (P) because it is a price taker. Therefore, the long run marginal cost (LMC) must be equal to the price in order for the firm to earn zero economic profit.
3. LAC = P
Since the firm is earning zero economic profit, the price must also be equal to the long run average cost (LAC). This indicates that the firm is producing at the minimum point on its average cost curve.
Therefore, the correct answer is option 'A' - LMC = LAC = P.
1. LMC = LAC
In the long run, a competitive firm will produce at the point where long run marginal cost (LMC) is equal to long run average cost (LAC). This means that the firm is producing at the minimum efficient scale and there are no economies of scale left to be gained.
2. LMC = P
The competitive firm will sell its output at the market price (P) because it is a price taker. Therefore, the long run marginal cost (LMC) must be equal to the price in order for the firm to earn zero economic profit.
3. LAC = P
Since the firm is earning zero economic profit, the price must also be equal to the long run average cost (LAC). This indicates that the firm is producing at the minimum point on its average cost curve.
Therefore, the correct answer is option 'A' - LMC = LAC = P.
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