Long Run Analysis

• Profits now:

  $$\pi = pg(l) - wl - R.$$ (3)

  
  
  Where R = cost of entrepreneurial abilities. Thus $\pi$ is normal profit.
• After optimizing and taking into account the long run 0 profit criteria,

  $$p(AP_L - MP_L) = \frac{R}{l} - lw'(l).$$ (4)

  
  

  Figure 4: Average and Marginal Product versus Average and Marginal Cost

  

• If $R$ is small: per firm employment has risen, industry employment is lower.
• If $R$ is large: industry employment rises above the previous equilibrium level in the long run.
• If $\frac{R}{l} - lw'(l) = 0$, then $MP_L = AP_L$, and industry employment falls back to its original level though per firm employment has actually risen.