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Solution to homework 5

Solution to homework 5 - Econ 200 Autumn 2007 Ohio State...

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Econ 200 Autumn 2007 Ohio State University Homework Five Suggested Solution Chapter 13, pp 315: # 2 (2+2+2+2+2) 2. a. The price of a pair of running shoes falls in the long run. Lite and Kool is earning an economic profit. This profit attracts entry into the market. As new firms enter, the demand for Lite and Kools’ shoes decreases. The decrease in demand leads to the price of running shoes falling. b. The quantity of running shoes produced by Lite and Kool decreases in the long run. Lite and Kool is earning an economic profit. This profit attracts entry into the market. As new firms enter, the demand for Lite and Kools’ shoes decreases. The decrease in demand leads to the quantity of running shoes produced by Lite and Kool decreasing. c. The quantity of running shoes in the market as a whole increases in the long run. Lite and Kool is earning an economic profit. This profit attracts entry into the market. As new firms enter, each initial firm decreases its output a bit. But the new firms produce more shoes and, on net, the quantity of shoes in the entire market increases.
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