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I am curious how I solve this question, I will include an image below. I am not looking to be spoon-fed just informed. If you could answer and provide an expiation for the answer that would be awesome!

The graphs below depict the perfectly competitive market for apples on the left and Farmer Johns perception of the market for apples as an individual farmer on the right. Assume farmer Johns costs are represented by SRATC-1. In the long run will farmer John choose a high, medium, or low level capital for his farm. Indicate the SRATC curve associated with Johns decision. Explain what is going on short term for Johns apple farm. (Drawing a typical MC curve might be helpful)

Is the equilibrium price depicted here a long run equilibrium ? How do you know? If not what will happen to move the market towards the long run? Show the change the move the market towards the long run equilibrium and label the long run equilibrium price, market quantity and johns long run produced quantity?

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closed as off-topic by cc7768, optimal control, dismalscience, FooBar, Kitsune Cavalry Nov 11 '15 at 4:22

This question appears to be off-topic. The users who voted to close gave this specific reason:

  • "This question does not appear to be about economics, within the scope defined in the help center." – cc7768, optimal control, dismalscience, FooBar, Kitsune Cavalry
If this question can be reworded to fit the rules in the help center, please edit the question.

  • $\begingroup$ Hi. Welcome to Economics.SE. Please read the welcome before posting. We tend to be a little picky about how homework questions are presented (for both your benefit and ours) and we don't accept images as questions (the graphs can be posted as an image, but the text should be typed and thought about). As is I'm voting to close. $\endgroup$ – cc7768 Nov 9 '15 at 21:23
  • $\begingroup$ I will edit the question now $\endgroup$ – Austin Nov 9 '15 at 21:31
  • $\begingroup$ Fixed that, please help. $\endgroup$ – Austin Nov 9 '15 at 21:39
  • $\begingroup$ @AustinSweat with using images for your questions, your question will be probably put as hold-on. StackExchange platforme aims to be helpful to all community by answering to questions. Not using images are helpful for other users when they search something similar on Google. $\endgroup$ – optimal control Nov 9 '15 at 22:12
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It's been a while since I've look at perfect competition and cost curves.

First off, it's helpful if you draw the standard diagram for a perfectly competitive firm, one with supernormal profits and the other with normal profits (and compare it to the 3 types of situations in Johns diagram)

From what I do remember, Long run equilibrium under perfect competition consists of:

1) P = MC = MR (profit maximisation) 2) P = Min ATC

Remembering that the market is the price maker, and the individual firm (johns farm) is the price taker.

In the long run, market price (indicated by demand and supply intersection) must be level with the lowest point on the LRATC curve (also lowest point on SRATC-2). This doesn't appear to be the case in these diagrams, thus it must be a short run equilibrium.

So in order to adjust to this long run equilibrium two things need to happen

1) Either demand for apples falls, or supply of apples rises in the market for apples. To bring about a price consistent with the long run equilibrium

2) John needs his ATC to move from SRATC-1 to SRATC-2. (Because any perfectly competitive firm not at its minimum LRATC will, in the LR, change its input combination to take advantage of lower average costs).

According to Johns apple farm, the firm is earning abnormal/supernormal profits because of the position of price on SRATC-1 i.e it is not the case that P=min ATC=AR. There is a distance between ATC (higher than minimum ATC on SRATC-1) and AR. This distance is abnormal profits.

If firms are able to make positive profits by moving outward on the LRATC curve, those profits will attract entrants into the industry in the usual fashion (shifting the supply cure outward). Profits will eventually dissipate to zero.

In the long run, a perfectly competitive firm is allocatively and productively efficient: P=MC & ATC=MC i.e lowest point on SRATC-2 and LRATC.

In regards to the high medium or low level of capital, because there are 3 options and 3 SRATC curves, I believe it is medium (greater than the quantity associated with SRATC-1, and lower that then quantity associated with SRATC-3).

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