Question

Monopolistic Competition Model Suppose the U.S. economy starts out in the "long-run equilibrium with trade". Now, because of the pandemic, the costs of production have risen. For simplicity, suppose that only marginal costs have risen (uniformly). Fixed costs have not changed. a. Illustrate the shift up in the MC curve. Does any other curve shift? (assume none of the demand curves shift). b. Show what happens in the short-run to the quantity produced and the price it is sold at. c. Is the firm in b. making profits? Explain. d. a-c above characterizes the "new short-run equilibrium with trade". What happens in the long-run? i. In particular, based on your answer to c. above, what happens to the number of firms in the industry? ii. As the number of firms changes, what happens to the demand curves that the firm faces (the demand curve when it changes its own price, and the demand curve when all firms change their prices together)? Illustrate this shift in the demand curves. iii. How do the firm's output and price in the "new long-run equilibrium with trade" compare to the original long-run equilibrium with trade? If it is ambiguous, explain.

          Monopolistic Competition Model Suppose the U.S. economy starts out in the "long-run
equilibrium with trade". Now, because of the pandemic, the costs of production have risen. For
simplicity, suppose that only marginal costs have risen (uniformly). Fixed costs have not
changed.
a. Illustrate the shift up in the MC curve. Does any other curve shift? (assume none of
the demand curves shift).
b. Show what happens in the short-run to the quantity produced and the price it is sold
at.
c. Is the firm in b. making profits? Explain.
d. a-c above characterizes the "new short-run equilibrium with trade". What happens
in the long-run?
i. In particular, based on your answer to c. above, what happens to the number of
firms in the industry?
ii. As the number of firms changes, what happens to the demand curves that the
firm faces (the demand curve when it changes its own price, and the demand
curve when all firms change their prices together)? Illustrate this shift in the
demand curves.
iii. How do the firm's output and price in the "new long-run equilibrium with
trade" compare to the original long-run equilibrium with trade? If it is
ambiguous, explain.

Monopolistic Competition Model Suppose the U.S. economy starts out in the "long-run
equilibrium with trade". Now, because of the pandemic, the costs of production have risen. For
simplicity, suppose that only marginal costs have risen (uniformly). Fixed costs have not
changed.
a. Illustrate the shift up in the MC curve. Does any other curve shift? (assume none of
the demand curves shift).
b. Show what happens in the short-run to the quantity produced and the price it is sold
at.
c. Is the firm in b. making profits? Explain.
d. a-c above characterizes the "new short-run equilibrium with trade". What happens
in the long-run?
i. In particular, based on your answer to c. above, what happens to the number of
firms in the industry?
ii. As the number of firms changes, what happens to the demand curves that the
firm faces (the demand curve when it changes its own price, and the demand
curve when all firms change their prices together)? Illustrate this shift in the
demand curves.
iii. How do the firm's output and price in the "new long-run equilibrium with
trade" compare to the original long-run equilibrium with trade? If it is
ambiguous, explain.

Added by William K.

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