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My question is from production side. Firms which are using better resources will have low cost curves than other firms and earn more profits. To ensure the supply of these effecient resources firms have to pay more than transfer prices and this difference is economic rent. So, their whole profit is used as these economic rent and their average cost is same as theother firms which are not using better resources.

Is this type of situation possible in perefect competition?

Panel(a) are the firms using efficient resources. figure showing cost curve

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  • $\begingroup$ The definition of perfect competition prevents this since it assumes there are other potential entrants to the market who are as efficient as the rent-gathering firm and who will then compete away the rent. $\endgroup$
    – Henry
    Nov 7 '17 at 18:17
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So, the answer is no. Panel (a) is not possible in perfect competition.

And it follows much of the idea from the previous answer. The price will be equal to the average cost if the firm is to have zero profit. Moreover, from the maximization of the firm's problem, price will also equal the marginal cost. This situation is given to you on panel (b).

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Suppose the competitive price is P. If you quote at a a higher price Ph2>P, then someone else, say firm 2, will quote at a slightly lower price than you, say Ph2, and Ph1>Ph2>P. Since competition is perfect, firm 2 will capture all the market and you will go bankrupt. But firm 3 may put price Ph3 such that Ph2>Ph3>P and capture all the market. This process can be repeated until the equilibrium price is reached.

On the other hand, if you place a price that is below the competitive price, you will go bankrupt.

Hence, there is no economic rent because all firms in the competitive equilibrium will choose the equilibrium price which gives them an economic profit(rent) of zero.

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  • $\begingroup$ Thanks for answering. I knew this point of view but I was asking from production point of view. I have changed the details as earlier details were not so clear. Please see the new details and you may answer again. Thanks. $\endgroup$ Nov 6 '17 at 19:28

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