1. Suppose that a competitive industry is in long-run competitive equilibrium. Then the price of a substitute good (in consumption) decreases. What will happen in the short run to

a. The market demand curve?

b. The market supply curve?

c. Market price?

d. Market output?

e. The firm's output?

f. The firm's profit?

What will happen in the long run?

2. Quadplex Cinema is the only movie theater in Idaho Falls. The nearest rival movie theater, the Cedar Bluff Twin, is 35 miles away in Pocatello. Thus, Quadplex Cinema possesses a degree of market power. Despite having market power, Quadplex Cinema is currently suffering losses. In a conversation with the owners of Quadplex, the manager of the movie theater made the following suggestions: "Since Quadplex is a local monopoly, we should just increase ticket prices until we make enough profit."

a. Comment on this strategy.

b How might the market power of Quadplex Cinema be measured?

c. What options should Quadplex consider in the long run?

3. Antitrust authorities at the Federal Trade Commission are reviewing your company's recent merger with a rival firm. The FTC is concerned that the merger of two rival firms in the same market will increase market power. A hearing is scheduled for your company to present arguments that your firm has not increased its market power through this merger. Can it be done? How? What evidence might you bring to the hearing?