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21 Apr 2018

Suppose a competitive industry has excess supply represented by a high number of firms producing surplus output; as the industry reaches long run equilibrium, what happens to each of the following:

Market demand curve

Market supply curve

The number of firms in the industry

The equilibrium or market clearing price

Economic profits for firms in the industry

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Reid WolffLv2

22 Apr 2018

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Related questions

1. In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?

a. P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20.

b. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0.

c. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0.

d. P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0.

2. Describe the supply curve of a constant cost industry.

a. Upward sloping

b. Flat

c. Downward sloping, then upward sloping

d. Downward sloping

3. At the profit-maximizing output level P = MC, if P > AC then firms can earn an above-normal profit, causing entry into the industry. True or false?

4. In a competitive market, the amount of a good that is produced is such that social surplus is:

a. Minimized

b. Maximized

c. Zero

d. Hidden

magentabee19

1) When positive economic profits exist in an industry:

the market price of the good produced by the industry is less than the marginal cost faced by the industry.

the market price of the good produced by the industry is less than the average total cost of the industry.

there is an exit of firms from the industry.

resources flow from less productive uses to that particular industry.

2) When price is less than the firms' minimum average total cost, ________.

firms' profits are likely to be maximum

prices are likely to fall further

new firms will enter the market

existing firms will leave the market

3) The entry of new firms into a perfectly competitive market will cause:

an increase in the profitability of existing firms.

a decrease in the profitability of existing firms.

a right shift of the demand curve of the good being produced by the firms.

a left shift of the demand curve of the good being produced by the firms.

4) Entry of new firms into an existing market causes:

a downward movement along the market supply curve.

a leftward shift of the market supply curve.

an upward movement along the market supply curve.

a rightward shift of the market supply curve.

5) The incentive for new firms to enter into a perfectly competitive market is primarily the:

high level of government intervention in the market.

large number of buyers in the market.

large number of existing firms in the market.

positive profits observed for the existing firms in the market.

Consider a competitive industry with a large number of firms, all of which have identical cost functions c(y)= y² + 1 for y>0 and c(0)=0. Suppose that initially, the demand curve for this industry is by D(p)=52-p. (The output of a firm does not have to be an integer number, but the number of firms does have to be an integer.)

1. What is the supply curve of an individual firm? If there are n firms in the industry, what will be the industry supply curve?

2. What is the smallest price at which the product can be sold?

3. What will be the LR equilibrium number of firms in the industry, equilibrium price, equilibrium output of each firm, equilibrium output of the industry?