Figure 14-12
-Refer to Figure 14-12. If the figure in panel (a) reflects the long-run equilibrium of a profit-maximizing firm in a competitive market, the figure in panel (b) most likely reflects

Question

Quizplus · Accepted Answer

Panel (b) shows a perfectly elastic long-run market supply, as the supply curve is horizontal at the minimum average total cost (ATC) of the firms in the industry. This indicates that firms can enter or exit the market without affecting market price, which is determined by the intersection of market demand and the supply curve at the minimum ATC. In contrast, panel (a) shows the equilibrium of a single firm in the industry, where marginal cost (MC) intersects marginal revenue (MR) at the quantity where MC equals price, which is also the minimum ATC. Therefore, the long-run equilibrium of a perfectly competitive industry involves firms operating at minimum ATC and earning zero economic profits, while the market supply is perfectly elastic.