Assume that you are hired as an analyst at a major New York consulting

firm. You did an industry analysis of the tribble

industry. After extensive research and two all-nighters, you have obtained

the following information:

Long-run costs:

o Capital costs: $5 per unit of output

o Labor costs: $2 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: 1.2 million tribbles. Demand for tribbles is

expected to grow rapidly over the next few years to a level twice 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 50 percent more.

Question:

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.