Return to Figure 9.2. Suppose P0 is $10 and P1 is $11. Suppose a new firm with the same LRAC curve...

Question

Return to Figure 9.2. Suppose P0 is $10 and P1 is $11. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4,000 units of output. Estimate from the graph what the new firm’s average cost of producing output would be. If the incumbent continues to produce 6,000 units, how much output would be supplied to the market by the two firms? Estimate what would happen to the market price as a result of the supply of both the incumbent firm and the new entrant. Approximately how much profit would each firm earn?

Figure 9.2

Robert · Accepted Answer

Suppose P0 = $10 is the initial long-run equilibrium price. In the long-run equilibrium, 
Market Price= Long Run Marginal Cost= Short Run Marginal Cost = minimum of Long Run 
Average Cost, all of which are same for every firm. The output- price combination when the 
competitive industry is at long run equilibrium. Suppose also that the price of the product has 
increased due to an overall rise in demand. Hence, the demand curve for the product of the 
industry shifts to the right and the new equilibrium price occurs at P1 = $ 11 > P0. At PI, the 
firms in the industry are making excess profits, since P1 exceeds the short run average costs.

Return to Figure 9.2. Suppose P0 is $10 and P1 is $11. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4,000 units of output. Estimate from the...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment