Chapter 7 Technical Questions 3 And 5 In The Textbook

Chapter 7 Technical Questions 3 And 5 In The Textbook5 Draw Graphs

Draw graphs showing a perfectly competitive firm and industry in long-run equilibrium. How do you know that the industry is in long-run equilibrium? Suppose that there is an increase in demand for this product. Show and explain the short-run adjustment process for both the firm and the industry. Show and explain the long-run adjustment process for both the firm and the industry. What will happen to the number of firms in the new long-run equilibrium?

In a perfectly competitive industry, the market price is $25. A firm is currently producing 10,000 units of output, its average total cost is $28, its marginal cost is $20, and its average variable cost is $20. Given these facts, explain whether the following statements are true or false: (a) The firm is currently producing at the minimum average variable cost. (b) The firm should produce more output to maximize its profit. (c) Average total cost will be less than $28 at the level of output that maximizes the firm's profit.

Suppose the demand curve for a monopolist is Q_D = 500 − P, and the marginal revenue function is MR = 500 − 2Q. The monopolist has a constant marginal and average total cost of $50 per unit. (a) Find the monopolist’s profit-maximizing output and price. (b) Calculate the monopolist’s profit. (c) What is the Lerner Index for this industry?

Paper For Above instruction

The set of technical questions derived from Chapter 7 of the textbook provides a comprehensive exploration of market equilibrium, firm behavior, and monopoly pricing strategies. Visualizing the long-run equilibrium in perfect competition is fundamental to understanding the dynamic adjustments that occur within competitive industries. Graphs depicting the industry supply and demand curves intersecting at the long-run equilibrium point, alongside individual firm cost structures, illustrate that in this stage, firms produce at the minimum point of their average total cost curves, ensuring zero economic profit.

These equilibrium conditions are confirmed by the following facts: the industry supply curve is perfectly elastic at the minimum average total cost, and firms have no incentive to enter or exit the market. The absence of economic profits or losses indicates a stable, long-run equilibrium state. However, an increase in demand prompts immediate short-run adjustments: firms increase output, leading to higher prices and profits, which attract new entrants over time. This influx shifts the industry supply curve outward, reducing prices and profits. In the long run, the industry reaches a new equilibrium with an increased number of firms, each producing at the minimum of their average total cost, and market price stabilizing at this level.

Regarding the specific data provided for a firm with market price at $25, current output of 10,000 units, average total cost at $28, and marginal and variable costs at $20, analysis reveals key insights. First, since the market price ($25) is below the average total cost ($28), the firm incurs a loss and is not covering all its costs. It is not producing at the minimum AVC, which is at $20, and since its marginal cost ($20) is less than the market price, the firm could increase output to improve profitability, suggesting it should produce more. Lastly, at the profit-maximizing output, the average total cost will likely be less than $28, assuming the firm increases output to where marginal cost equals marginal revenue, pointing toward potential economies of scale in that range.

The monopolist scenario involves a demand curve Q_D = 500 - P and a MR function MR = 500 - 2Q. Given constant marginal and average costs at $50, the profit-maximizing output is found where MR equals MC, i.e., 500 - 2Q = 50, leading to Q = 225 units. The corresponding price is P = 500 - Q = 275, using the demand function. Calculating profit involves subtracting total costs (Q x AC) from total revenue (Q x P), yielding a profit of (225 x (275 - 50)) minus (225 x 50), which results in a substantial profit margin. The Lerner Index, given by (P - MC)/P, measures market power and, with our numbers, signals a high degree of monopoly power, influencing the industry’s pricing behavior and consumer welfare.

These analyses underscore the importance of understanding market structures and firm strategies. Visual aids like graphs help clarify how competitive and monopolistic firms behave in different equilibrium states and how market forces drive industry adjustments over time. They serve as vital tools in economics education and policy-making, providing clarity on complex market dynamics.

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