3.5 Assume that you are employed as an analyst at an international consulting firm. Your latest assignment is to do an industry analysis of the fast-growing “telemonica” industry.

After extensive research on this combination cell phone and harmonica, you have obtained the following information:

■■ Long-run costs:

Capital costs: $40 per unit of output Labor costs: $25 per unit of output

■■ No economies or diseconomies of scale

■■ Industry currently earning a normal return to capital

(profit of zero)

■■ Industry perfectly competitive, with each of 100 firms producing the same amount of output

■■ Total industry output: 800,000 telemonicas. Demand for telemonicas is expected to grow rapidly over the next few years, especially in foreign markets, to a level four times as high as it is now, but (due to short-run diminishing returns) each of the 100 existing firms is likely to be producing only 100 percent more.

a. Sketch the long-run cost curve of a representative firm.

b. Show the current conditions by drawing two diagrams, one showing the industry and one showing a representative firm.

c. Sketch the increase in demand and show how the industry is likely to respond in the short run and in the long run.