WAEC Economics 2021 Theory — Question 21

Model answer

(i) Short-run: the firm is in equilibrium at the output where SMC (short-run marginal cost) = SAC (short-run average cost) = AR = MR. Where SAC is above SMC, SMC pulls the average cost down until this equilibrium point is reached. (ii) Long-run: since firms are free to enter or exit, abnormal profits attract new entrants (increasing supply and lowering price) until price falls to the minimum point of the long-run average cost curve, where AR=MR=LAC=LMC and firms earn only normal profit.