Question

Justify your answer using standard partial equilibrium analysis. It is sufficient to show by graphs, but provide logical reasoning.

1. Analyze the effects of entry of a new firm. More precisely imagine there are I consumers and J producers. Assume all these are price takers. Now suppose one more producer enters into the market. What happens to

(a) Supply and demand curve

(b) Equilibrium price

(c) Surplus of incumbent firms

d) Consumer surplus

(e) Total surplus

Answer 1

Supply curve shifts downwards to SS1

Eqm price falls & output rise

A) no effect on demand curve

Supply curve shifts to right , since one additional firm has entered

B) eqm price will fall, as Competition increase

C)surplus of incumbent firms fall, as eqm price in market falls

D) Consumer surplus rise, since price falls & eqm output rise

E) total surplus depends on whether increase in CS is greater than fall in PS or reverse.

If CS rises by more than fall in PS , then total surplus rise.

Otherwise it falls