Problem Set 08 (ECO100)

# Problem Set 08 (ECO100) - Prof Gustavo Indart Department of...

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Prof. Gustavo Indart Department of Economics University of Toronto ECO 100Y INTRODUCTION TO ECONOMICS Problem Set 8 1. This question traces some of the long-run adjustments that take place in a perfectly competitive market in response to a change in demand. Each firm currently in the industry, as well as each potential entrant, has the cost structure depicted in the left panel below. The right panel shows the industry's short-run supply curve and the current market demand curve D 0 . a) At the initial equilibrium, i) What are equilibrium price and output? ii) What is the output and profit of each firm in the industry? iii) How many firms are operating in this industry? d) Is the industry in long-run equilibrium? Explain. b) Suppose demand shifts to D 1 . At the new short-run equilibrium i) What are the equilibrium market price and quantity? ii) What is the output of each firm in the industry? iii) What is each firm's profit?

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2 c) Explain the changes in the industry's short-run supply curve after sufficient time has elapsed for entry and exit to occur given a constant cost industry in the long-run? d) At the new long-run equilibrium, i) What are the market price and quantity? ii) What is the output and associated profit of each firm? iii) How many firms will be active in this industry? 2. X is produced by a perfectly competitive constant cost industry. The diagram to the right shows the long-run cost curves of one of the firms and also the short run costs associated with two alternative plants. a) If the price of X is \$12, what is the profit-maximizing output in the short- run for a firm which has the larger of the two plants with SAC 2 and SMC 2 ?
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