Question

Market Supply and Demand Functions Cost functions for a typical firm in the industry $72 $72 $68 $64 $60 $56 $52 $68 $64 ATC $40 $36 $28 $24 1800 2100 2400 2700 3000 3300 3600 3900 4200 4500 4800 0 2 4 6 8 10 12 14 16 18 20

Answer 1

Consider the file HW6 - Short Run & Long Run. Currently, the equilibrium price of the product is dollars per unit, the equilibrium quantity is 3000 units, and there S40 3000/10 = 300 are firms in the industry each making an economic profit of 0 dollars.

Consider the file HW6 - Short Run & Long Run. Assume that this is a constant-cost industry. Suppose that the demand for this product increases by 1,200 units and stays at this higher level for ever. Then, in the short run, the equilibrium price of the product will equal $72 dollars per unit, the equilibrium quantity 4200 units, and there will be 300 firms in the industry each making an economic profit of (72-52)*14 = $280 dollars.

Consider the file HW6 - Short Run & Long Run. Assume that this is a constant-cost industry. Suppose that the demand for this product increases by 1,200 units and stays at this higher level for ever. Then, in the long run, the equilibrium price of the product will equal $40 dollars per unit, the equilibrium quantity 10 units, and there will be 420 firms in the industry each making an economic profit of 0. dollars.

It is a case of perfectly competitive industry. In the long run equilibrium, firms will always earn zero economic profit. Though, in the short run, firms can earn positive or negative economic profit. In the given scenario, with increase in demand by 1200 more units, the firms start earning positive economic profit. After seeing this, more new firms enter the market and supply increases. It decreases to the price to the level, where price = ATC and long run equilibrium is achieved with 0 economic profit.