Test2Answers2007 - ECO100 Term Test 2 (December 7, 2007)...

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ECO100 Term Test 2 (December 7, 2007) Answers I (a) See Diagram 14.5 (a), page 307 of text for the situation of the profit- making firm. (b) Because existing firms are making economic profits, new firms will enter the industry, causing the supply curve to shift rightward and market price to fall. In the long-term equilibrium, the representative firm will earn zero economic profits, so price will equal (minimum) ATC which is 10. (Remember that the MC schedule intersects the ATC schedule at the minimum point on the ATC schedule.) (c) (i) market price is unchanged (ii) the firm’s level of output is unchanged, since its MC schedule does not change (iii) the firm’s ATC will fall, since ATC = AVC + AFC and AFC will fall (iv) the firm’s level of profits will increase, since P is unchanged, q is unchanged, and ATC falls II (a) The MC schedule will shift downward, so the profit-maximizing level of output will rise and price will fall. See Figure 15.5, page 328 of text for the determination of the monopolist’s level of output. (b)
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Test2Answers2007 - ECO100 Term Test 2 (December 7, 2007)...

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