Problem 4:(15 points - 5 points each)

This question has you consider a perfectly competitive industry that is currently in equilibrium (i.e., all existing firms in the industry are making zero economic profits; they are covering all of their fixed and variable costs).Because it is a perfectly competitive industry, all firms in this industry make a non-differentiated product and take the market price as given.After each question below is a depiction of the market (in the right-hand panel) and a typical firm (in the left-hand panel).All firms in the industry have the same costs (as depicted in the panel for a typical firm).

Predict what will happen to various quantities given the set of changes that might occur below. Each change should be considered independently. Use the graphs below to determine and explain your answers

A.Change: An increase in the demand for the good at all possible prices.

Equilibrium Price in the short run:

Equilibrium Market quantity in the short run:

Equilibrium Profits in the short run:

Equilibrium individual firm quantity in the short run:

The number of firms in the long run:

$Typical Individual FirmPrice Market

D₀S₀

MC₀

ATC₀

P₀

q_i0q_iQ₀Q

B.There is an increase in the cost of labor, which is a variable input to all firms' production process.

Equilibrium Price in the short run:

Equilibrium Market quantity in the short run:

Equilibrium Profits in the short run:

Equilibrium individual firm quantity in the short run:

The number of firms in the long run:

$Typical Individual FirmPrice Market

D₀S₀

MC₀

ATC₀

P₀

q_i0q_iQ₀Q

C.There is an increase in supply due to the removal of trade restrictions that has in the past prevented foreign firms from supplying to this market. What happens to the original firm in the industry.

Equilibrium Price in the short run:

Equilibrium Market quantity in the short run:

Equilibrium Profits in the short run:

Equilibrium individual firm quantity in the short run:

The number of original firms in the long run:

$Typical Individual FirmPrice Market

D₀S₀

MC₀

ATC₀

P₀

q_i0q_iQ₀Q

Problem 4:(15 points - 5 points each)

This question has you consider a perfectly competitive industry that is currently in equilibrium (i.e., all existing firms in the industry are making zero economic profits; they are covering all of their fixed and variable costs).Because it is a perfectly competitive industry, all firms in this industry make a non-differentiated product and take the market price as given.After each question below is a depiction of the market (in the right-hand panel) and a typical firm (in the left-hand panel).All firms in the industry have the same costs (as depicted in the panel for a typical firm).

Predict what will happen to various quantities given the set of changes that might occur below. Each change should be considered independently. Use the graphs below to determine and explain your answers

A.Change: An increase in the demand for the good at all possible prices.

Equilibrium Price in the short run:

Equilibrium Market quantity in the short run:

Equilibrium Profits in the short run:

Equilibrium individual firm quantity in the short run:

The number of firms in the long run:

$Typical Individual FirmPrice Market

D₀S₀

MC₀

ATC₀

P₀

q_i0q_iQ₀Q

B.There is an increase in the cost of labor, which is a variable input to all firms' production process.

Equilibrium Price in the short run:

Equilibrium Market quantity in the short run:

Equilibrium Profits in the short run:

Equilibrium individual firm quantity in the short run:

The number of firms in the long run:

$Typical Individual FirmPrice Market

D₀S₀

MC₀

ATC₀

P₀

q_i0q_iQ₀Q

C.There is an increase in supply due to the removal of trade restrictions that has in the past prevented foreign firms from supplying to this market. What happens to the original firm in the industry.

Equilibrium Price in the short run:

Equilibrium Market quantity in the short run:

Equilibrium Profits in the short run:

Equilibrium individual firm quantity in the short run:

The number of original firms in the long run:

$Typical Individual FirmPrice Market

D₀S₀

MC₀

ATC₀

P₀

q_i0q_iQ₀Q