(a) (b) Price Price MC Supply0 Supply1 ATC P2 B P1 A C P0 D Demand1 Demand0 Q1 Q2 Quantity Q1^M Q2^M Q3^M Q4^M Quantity
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When the market is in long-run equilibrium at point A in panel (b), the firm represented in panel (a) will have a zero economic profit. This is because in the long run, firms will enter or exit the market until economic profits are driven to zero. Therefore, the Show more…
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Assume that a perfectly competitive market in long-run equilibrium with firms earning zero profit experiences a sudden decrease in demand for its good. As a result, in the long run, the drop in marginal revenue will cause firms to exit the market. The graph on the right shows the initial market equilibrium, along with the new demand curve that resulted from the sudden decrease in demand. How does a change in the number of firms in the market impact the market equilibrium? 1.) Using the point drawing tool, illustrate the new short-run equilibrium as a result of the demand curve changing from D1 to D2. 2.) Using the 3-point curve drawing tool, show the long-run effect of the change in the number of firms, as discussed above. Label this curve 'S2'. Carefully follow the instructions above and only draw the required objects.
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Refer to the figure above. Assume the market starts in a long-run equilibrium at point Z in panel (b). Then, a decrease in demand from D1 to D0 will ultimately lead to: a. firms exiting the industry and a new long-run equilibrium at point W in panel (b) b. firms entering the industry and a new long-run equilibrium at point Z in panel (b) c. a new long-run equilibrium at point X in panel (b) d. lower prices once the new long-run equilibrium is reached.
12. A monopolistic firm will make decisions on its quantity and price by: a. taking price as given from the market and producing where MR = MC. b. producing where MR = MC and setting the price for this quantity from the demand curve. c. taking quantity as given from the market and setting the price for this quantity from the demand curve. d. producing where MR = MC and setting the price so that P = MR = MC. 13. Suppose firms in monopolistic competitive market are making economic profits, eventually, a. they shut down. b. they exit the industry. c. new firms enter the industry. d. the firms in the market increase their production so that their economic profit disappears. Short Answer Questions Figure A Price and cost (dollars per unit) 1. Figure A shows the cost and demand curves for a monopolist a. What is the value of consumer surplus if the monopoly maximizes profit? b. What is the value of consumer surplus, market output and market price if the monopoly is to operate like a perfectly competitive firm? c. What is the value of deadweight loss? d. Fill in the missing blanks: Compared to a perfectly competitive firm, the monopoly creates ______ and decreases ______.
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