Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006
206 PRICE AND OUTPUT UNDER PERFECT COMPETITION [CHAP. 8supply function:QD ¼ QS70,000 5000(4) ¼ 40,000 þ 2500(4)70,000 20,000 ¼ 40,000 þ 10,00050,000 ¼ 50,000 (equilibrium quantity 1)(c)Since all firms are identical and each produces 500 units of output (assumption 1) when the industry is in longrunequilibrium, there will be 100 such firms in the industry.When the market demand function changes to QD 0 , the new market equilibrium price and quantity areobtained byQD 0 ¼ QS100,000 5000P ¼ 40,000 þ 2500P60,000 ¼ 7,500PP ¼ $8 (equilibrium price 2)100,000 5000(8) ¼ 40,000 þ 2500(8)60,000 ¼ 60,000 (equilibrium quantity 2)In the short run, the number of firms in the industry is still 100 and each must still operate its optimum scale ofplant. However, each firm now produces and sells 600 units of output. Since at this output, SAC ¼ $4.50(assumption 2), each firm is making $3.50 profit per unit and $2100 in total.8.20 (a) With reference to Problem 8.19, if in the long run the market demand function remains atQD 0 ¼ 100,000 2 5000P but the market supply function becomes QS 0 2 70,000 þ 2500P, (a) whatare the new long-run equilibrium price and quantity for this industry? (b) What type of industry isthis? What does this imply for factor prices? (c) Draw a figure (similar to Fig. 8-8 in the text)showing the steps in parts (a) and (b) of Problem 8.19 and in part (a) of this problem.(a)The new long-run equilibrium price and quantity becomeQD 0 ¼ QS 0100,000 5000P ¼ 70,000 þ 2500P30,000 ¼ 1,500PP ¼ $4 (equilibrium price 3)100,000 5000(4) ¼ 70,000 þ 2500(4)80,000 ¼ 80,000 (equilibrium quantity 3)(b)Since this market equilibrium price is the same as equilibrium price 1 [see Problem 8.19(a)], the LS curve ofthe industry is horizontal and the industry is a constant cost industry. This means that as the industry outputexpands, either all factor prices remain unchanged or the increase in some factor prices are exactly balanced bythe reduction of others. If all factor prices remain unchanged, then the cost curves of each firm remain completelyunchanged (i.e., they will shift neither up nor down, nor sideways). Each firm will remain in exactly thesame position as in part (a) of Problem 8.19, but now we have 160 firms in the industry (each producing 500 ofthe 80,000 units of the industry equilibrium output) rather than 100 firms as in part (b) of Problem 8.19.
CHAP. 8] PRICE AND OUTPUT UNDER PERFECT COMPETITION 207(c) The steps in parts (a) and (b) of Problem 8.19 and in part (a) of this problem are shown in Fig. 8.19.Fig. 8-198.21 Suppose that in Problem 8.20(a), the market supply function in the long run became insteadQS 0 ¼ 55,000 2 2500P. (a) What would the new industry long-run equilibrium price and quantitybe? (b) Explain why this is an increasing cost industry, (c) If, as the result of a change in (relative)factor prices, each firm’s entire set of cost curves shifts not only upward but also to the left, so thatthe lowest LAC occurs now at the output of 400 units, how many firms would there be in this industry?(d) Draw a figure similar to that in Problem 8.20(c) but reflecting the changes introduced in thisproblem.(a)The new equilibrium price and quantity becomeQD 0 ¼ QS 0100,000 5000P ¼ 55,000 þ 2500P45,000 ¼ 7500PP ¼ $6 (new equilibrium price 3)100,000 5000(6) ¼ 70,000 (new equilibrium quantity 3)(b) Since this new long-run equilibrium price is greater than equilibrium price 1 [see Problem 8.19(a)], we have anincreasing cost industry. That is, as industry output rises, there is a net absolute increase in factor prices so thatthe whole set of each firm’s cost curves shifts up, and the lowest LAC of each firm now becomes $6 [from $4 atlong-run equilibrium 1 in Problem 8.19(a)]. This increase in costs resulting from the expansion of the entireindustry is called an “external diseconomy” and will be discussed in detail in Chapter 14.(c) Since at the new long-run equilibrium point 3, each firm will produce 400 units of output, there will be 175firms in the industry (to produce the new long-run industry equilibrium output of 70,000 units).
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CHAP. 8] PRICE AND OUTPUT UNDER PERFECT COMPETITION 207
(c) The steps in parts (a) and (b) of Problem 8.19 and in part (a) of this problem are shown in Fig. 8.19.
Fig. 8-19
8.21 Suppose that in Problem 8.20(a), the market supply function in the long run became instead
QS 0 ¼ 55,000 2 2500P. (a) What would the new industry long-run equilibrium price and quantity
be? (b) Explain why this is an increasing cost industry, (c) If, as the result of a change in (relative)
factor prices, each firm’s entire set of cost curves shifts not only upward but also to the left, so that
the lowest LAC occurs now at the output of 400 units, how many firms would there be in this industry?
(d) Draw a figure similar to that in Problem 8.20(c) but reflecting the changes introduced in this
problem.
(a)
The new equilibrium price and quantity become
QD 0 ¼ QS 0
100,000 5000P ¼ 55,000 þ 2500P
45,000 ¼ 7500P
P ¼ $6 (new equilibrium price 3)
100,000 5000(6) ¼ 70,000 (new equilibrium quantity 3)
(b) Since this new long-run equilibrium price is greater than equilibrium price 1 [see Problem 8.19(a)], we have an
increasing cost industry. That is, as industry output rises, there is a net absolute increase in factor prices so that
the whole set of each firm’s cost curves shifts up, and the lowest LAC of each firm now becomes $6 [from $4 at
long-run equilibrium 1 in Problem 8.19(a)]. This increase in costs resulting from the expansion of the entire
industry is called an “external diseconomy” and will be discussed in detail in Chapter 14.
(c) Since at the new long-run equilibrium point 3, each firm will produce 400 units of output, there will be 175
firms in the industry (to produce the new long-run industry equilibrium output of 70,000 units).
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