solutionwk7 - 1. Suppose the market for apples is perfectly...

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1. Suppose the market for apples is perfectly competitive and all apple-picking firms are identical with the usual upward sloping MC and U-shaped ATC curves. a. Assume the market is initially in a long-run equilibrium. In the left-hand panel of the diagram below, draw and label all curves that are necessary to illustrate this long-run equilibrium. In addition, label the output level, q 0 , that each firm will produce. Q 0 Q D P q $/unit q 0 MC ATC MR 0 P 0 Typical Firm Market S b. Suppose that an increase in the price of ladders (which are required to pick apples) increases the cost of picking each additional apple by the same amount. Show the effects in the diagram below on the individual firm and market in the short run and in the long run , illustrating any possible curve shifts. Label the initial long run equilibrium, P 0 , Q 0 , the short-run equilibrium as P 1 , Q 1 and the quantity that the firm produces in the initial long run equilibrium q 0 and the short run as q 1 . Also label the long-run equilibrium as P F , Q F and the quantity the firm produces in the long run as q F . Q 0 Q S P q $/unit ATC MR 0 P 0 q 1 q 0= q F MC’ ATC’ MC S’ Q F Q 1 P F P 1 D S F
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c. What happens to the profits of the typical firm in the short run? What happens to firm profits in the long run compared to the initial long-run equilibrium? In each case, briefly explain how you know. In the short run, profits fall. In the short run, the market supply curve will shift up by the exact amount that the MC and ATC curves shifted up. The reason is that to continue producing at the original level, firms require an increase in price equal to the increase in MC. However, because
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solutionwk7 - 1. Suppose the market for apples is perfectly...

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