10. Fixed Proportions Production vigg - The long run supply curve of a perfectly competitive industry (LS) shows the minimum average cost for each level of industry output. Industry Q is the sum of the quantities (q) of the firms. Along LS, there is no incentive for entry or exit, as profits are zero. No firm has an incentive to alter its output, because each produces the q that minimizes its LRAC. > The LS for a constant cost industry is perfectly elastic (horizontal). The LS for an increasing cost industry is upward sloping, because as the industry grows, rising demand for inputs shifts up each firm's marginal and average cost curves. Note: The slope of LS for an industry is has nothing to do with economies of scale for firms in that industry. The whatnot industry employs three inputs: labor (L), capital (K), and land (G). The production function is fixed proportions: Q = min{10L, 10K, 10G} %3D Combining one unit each of L, K, and G produces Q = 10 whatnots. %3D Both L and K are perfectly elastically supplied. Input prices are: PL = $2 PK = $3 Growth in the output of the whatnot industry puts upward pressure on the price of land. The supply of the land input to industry X is: PG = .01Q %3D → Derive the long run industry supply schedule (LS). K G PG PGG PLL PkK TC MC LS 100 10 10 10 1 10 30 60 .60 > .80 200 20 20 20 40 300 400 500 20
10. Fixed Proportions Production vigg - The long run supply curve of a perfectly competitive industry (LS) shows the minimum average cost for each level of industry output. Industry Q is the sum of the quantities (q) of the firms. Along LS, there is no incentive for entry or exit, as profits are zero. No firm has an incentive to alter its output, because each produces the q that minimizes its LRAC. > The LS for a constant cost industry is perfectly elastic (horizontal). The LS for an increasing cost industry is upward sloping, because as the industry grows, rising demand for inputs shifts up each firm's marginal and average cost curves. Note: The slope of LS for an industry is has nothing to do with economies of scale for firms in that industry. The whatnot industry employs three inputs: labor (L), capital (K), and land (G). The production function is fixed proportions: Q = min{10L, 10K, 10G} %3D Combining one unit each of L, K, and G produces Q = 10 whatnots. %3D Both L and K are perfectly elastically supplied. Input prices are: PL = $2 PK = $3 Growth in the output of the whatnot industry puts upward pressure on the price of land. The supply of the land input to industry X is: PG = .01Q %3D → Derive the long run industry supply schedule (LS). K G PG PGG PLL PkK TC MC LS 100 10 10 10 1 10 30 60 .60 > .80 200 20 20 20 40 300 400 500 20
Chapter8: Perfect Competition
Section: Chapter Questions
Problem 2.4P
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Transcribed Image Text:10.
Fixed Proportions Production
> The long run supply curve of a perfectly competitive industry (LS) shows the minimum
average cost for each level of industry output. Industry Q is the sum of the quantities (q)
of the firms. Along LS, there is no incentive for entry or exit, as profits are zero. No firm
has an incentive to alter its output, because each produces the q that minimizes its LRAC.
> The LS for a constant cost industry is perfectly elastic (horizontal). The LS for an
increasing cost industry is upward sloping, because as the industry grows, rising demand
for inputs shifts up each firm's marginal and average cost curves. Note: The slope of LS
for an industry is has nothing to do with economies of scale for firms in that industry.
The whatnot industry employs three inputs: labor (L), capital (K), and land (G).
The production function is fixed proportions:
Q = min{10L, 10K, 10G}
Combining one unit each of L, K, and G produces Q = 10 whatnots.
Both L and K are perfectly elastically supplied. Input prices are:
PL = $2 PK = $3
Growth in the output of the whatnot industry puts upward pressure on the price of land.
The supply of the land input to industry X is:
PG = .01Q
→ Derive the long run industry supply schedule (LS).
L
K
G
PG
PGG
PLL PKK
TC
MC
LS
100
10
10
10
1
10
30
60
.60
> .80
200
20
20
20
2
40
300
400
500
11
Fnyelope Curve I
20
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