Question
There are two types of firms with two different cost structures in a competitive market for shoes. Let us name those firm types as Type
There are two types of firms with two different cost structures in a competitive market for shoes. Let us name those firm types as Type "A "and Type B. Type "A" firms are able to produce shoes at a lower cost than Type B firms can such that
min(ATCA)< min(ATCB)
Now suppose that the market is in its long-run equilibrium level. All the incumbent firms (firms which are already in the market) are Type "A" firms and all the potential entrants (firms not in the market but waiting to enter if they see positive economic profit opportunity) are Type B firms. Due to a sudden increase in consumers' income, the demand for shoes goes up.
- a)Draw two diagrams (one for the firm and one for the market) to show what happens to market price and a typical Type "A" firm's output and profit levels in the short-run.
- b)On different diagrams, show what happens to market price and firm profits in the long-run (Hint: Recall that all the potential entrants are Type B firms).
- c)What does your long-run market supply curve look like?
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