Question
ECON Product X is sold in a perfectly competitive, constant-cost industry. a. Draw a side-by-side graph for product X showing the market in long-run equilibrium
ECON
Product X is sold in a perfectly competitive, constant-cost industry.
a. Draw a side-by-side graph for product X showing the market in long-run equilibrium with an individual firm earning normal profit. Label each of the following:
i) The market's equilibrium price (PE) and quantity (QE)
ii) The firm's profit-maximizing quantity (QE)
b. How would it affect the quantity sold or transacted if the government imposed a price ceiling above PE?
c. The price of Z, a substitute for product X, increases. Illustrate on your graphs from part (a) the result of this in the short run.
i) Label the new market price (P2) and new market quantity (Q2).
ii) Shade completely any profit or loss for the firm.
d. The price of Z increased by 20 percent, while the quantity demanded of X changed by 40 percent. What is the cross-price elasticity of X and Z?
e. What happens to the productive efficiency of the firm in the short run as a result of the change described in part (c)?
f. What will happen to the price of X in the long run? Explain.
g. In long-run equilibrium, the individual firm produces 100 units of X. At that level of output, its total cost is $500. If the firm is earning normal profits, what must be the market price?
h. The whole market from part (g) clears at a quantity of 1 million units in the long run. If the constant long-run supply would intersect the y-axis at $1 and the demand curve intersects the y-axis at $9, what is the consumer surplus?
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