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ECON100A_17 - that there are more firms also shifts the...

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 1/4/2008 1 Review For Final Exam
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 1/4/2008 2 Equilibrium Dynamics A to B: Shift in demand causes new price P2. Quantity produced by firm cannot be adjusted in Very Short Run, nor can # of firms be adjusted. B to C: At the firm level, each firm adjusts labor and produces more. As firms do this, the quantity brought to market rises and so price falls. In the short-run, this process stabilizes at C, where P=SMC at the firm level and new demand D2 intersects the short-run supply curve, SS1 at the market level. C to D: Two things happen in the long run. Firms are making profits, so new firms enter. This causes quantity brought to market to rise and price to fall. Also, firms adjust their quantity produced to respond to the lower price. The process stabilizes at D. Each firm is producing exactly what it produced before, but there are more firms, and thus higher quantity brought to market. (The fact
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Unformatted text preview: that there are more firms also shifts the market level short-run supply curve out.) Q P 2 P 3 P 1 $ LAC LMC SMC Q A C D $ SS 2 D 1 SS 1 LS D 2 B C A D B 1/4/2008 3 Equilibrium Dynamics Simplifying…. Q P $ LAC LMC SMC Q A D $ SS 2 D 1 SS 1 LS D 2 A D 1/4/2008 4 Question a. Suppose long-run average cost for a firm that produces engine valves is given by LAC(Q,w,r)= Q 2-10Q+50. If the manufacture of engine valves is a constant cost industry consisting of N identical firms, what is the numerical value of the long-run equilibrium price, P? What quantity, q*, does the firm produce? b. What happens to q* (for the firm) in the long-run if the demand for engine valves rises? Does it rise, fall or stay the same....
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