Let's suppose that it costs producers a minimum of y dollars to produce a widget (it may actually cost more, depending on the producer, but that is the bare minimum). In a competitive equilibrium, where there are several producers of this identical widget, would the selling price of the widget be $y?

Please explain your reasoning.


I have arrived at the selling price of $y based on this algorithm.

  • $\begingroup$ Are those the marginal or average costs? $\endgroup$ – BB King Mar 9 '19 at 20:35
  • $\begingroup$ @BBKing: Average costs $\endgroup$ – Joebevo Mar 10 '19 at 9:04

The long run equilibrium price should be $\$ y,$ however, in the short run, we only know that price must be higher that the minimum average variable cost (of which no info is given).

In the long run all production takes place at the minimum average cost. All firms with average cost higher than $\$y$ will either adapt their technology and reduce their costs or exit the market.

  • $\begingroup$ Hi Patricio, thanks for your answer. Could you please elaborate why it is $y, in terms of a simple argument? It would help me very much. $\endgroup$ – Joebevo Mar 8 '19 at 1:49
  • $\begingroup$ Just one clarification: In the long run, does production take place at the minimum average VARIABLE cost? $\endgroup$ – Joebevo Mar 11 '19 at 4:53
  • $\begingroup$ No, in the long run all costs need to be covered by the price. Otherwise, the firm would have looses $\endgroup$ – Patricio Mar 11 '19 at 8:11

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