Problem Set 6sol

# Problem Set 6sol - 1 ECONOMICS 100 NOTES ON PROBLEM SET #6...

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ECONOMICS 100 NOTES ON PROBLEM SET #6 Short and Long Run Competition, Monopoly and Other Markets For diagrams, see attachment at the end of this document/separate file. 1. Constant Cost Perfectly Competitive Industry Consider a cabbage growing industry which is perfectly competitive and which has a large number of firms with identical cost curves. Assume each firm uses two factors of production: land, which is fixed in the short run and variable in the long run; and labour, which is variable in both the short and the long run. Use diagrams to determine the impact of an increase in the price of land, assuming that the long-run supply curve of the cabbage industry exhibits constant costs. In particular, show the impact on: * the price, output, and profit of the individual firm in the short and long run, * the price and output of the industry in the short and long run. Only SAC shifts in short run. Since SMC has not shifted, there is no change in Industry SRS. Consequently equilibrium P and Q are unchanged. Each firm suffers losses. In the long run, some firms exit. As they do, SRS shifts to the left, causing equilibrium price to rise, along the D schedule. This process of firms exiting continues until losses are eliminated i.e. until P = Min SAC (on the new higher SAC schedule). Here are some elements of the Final Result: Fewer firms; higher P; Lower Q; Each firm’s Profits = 0. 2. Short and Long Run Cumquats are produced in a perfectly competitive industry consisting of a large number of identical and independently managed firms. All inputs, including labour, are available to the cumquat industry at unchanged input prices. The industry is initially in long run equilibrium with each firm earning normal profits. With the aid of carefully labelled diagrams, examine the full impact on the

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## This note was uploaded on 01/16/2011 for the course ECO ECO100 taught by Professor Inheart during the Fall '09 term at University of Toronto- Toronto.

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Problem Set 6sol - 1 ECONOMICS 100 NOTES ON PROBLEM SET #6...

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