Suppose the bottle water industry is competitive. If a bottle of water supplied by the typical firm has an ATC of 20 cents and the market price if 30 cents, is the bottle water industry in long run equilibrium?
To determine if the bottle water industry is in long-run equilibrium, we need to compare the average total cost (ATC) and the market price.
In a competitive industry, firms aim to maximize profits. In the long run, firms have flexibility to adjust their inputs, such as labor and capital, to minimize costs and maximize efficiency. At equilibrium, firms earn zero economic profit, indicating that they are covering all their costs, including a fair return on investment.
Here's how we can analyze the given information to determine if the industry is in long-run equilibrium:
1. Calculate the profit per bottle: Market price - ATC.
Profit per bottle = 30 cents - 20 cents = 10 cents.
2. Compare the profit per bottle to zero.
If profit per bottle is zero, the firms are earning a normal rate of return, indicating long-run equilibrium. If it is positive, there is an incentive for new firms to enter the industry, increasing competition. If it is negative, some firms may exit the industry to minimize losses.
In this case, the profit per bottle is positive (10 cents), indicating that firms are making a profit. Therefore, the bottle water industry is not in long-run equilibrium. Over time, more firms are likely to enter the industry to take advantage of the profit opportunity, which will increase competition and potentially drive down prices until firms earn zero economic profit.