Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

208 PRICE AND OUTPUT UNDER PERFECT COMPETITION [CHAP. 8
(d ) Fig. 8-20 is similar to that in Problem 8.20(c) but reflects the changes introduced in this problem.
Fig. 8-20
8.22 Suppose that in Problem 8.20(a), the market supply function in the long run became instead
QS 0 ¼ 85,000 þ 2500P. (a) What would the new industry long-run equilibrium price and quantity
be? (b) Explain why this is a decreasing cost industry, (c) If, as a result of a change in relative factor
prices, the entire set of cost curves of each firm shifted not only downward but also to the right so
that the lowest point on the LAC curve occurs now at the output of 600 units, how many firms will
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 ad quantity become
QD 0 ¼ QS 0
100,000 5000p ¼ 85,000 þ 2500P
15,000 ¼ 7500p
P ¼ $2 (new equilibrium price 3)
100,00 5000(2) ¼ 85,000 þ 2500(2)
90,000 ¼ 90,000 (new equilibrium quantity 3)
(b)
(c)
Since the new long-run equilibrium price 3 is lower than the long-run equilibrium price 1 [see Problem
8.19(a)], this is a decreasing cost industry. That is, as industry output rises, there is a new absolute reduction
in factor prices so that the whole set of each firm’s cost curves shifts down, and the lowest LAC becomes $2
[from $4 at long-run equilibrium 1 in Problem 8.19(a)]. This reduction in costs resulting from the expansion of
the entire industry is called an “external economy” and will be discussed in detail in Chapter 14. It should be
noted that decreasing cost industries are the least prevalent of the three cases discussed, while increasing cost
industries are the most prevalent.
The LAC curve not only shifts down but we are told that it also shifts to the right. At the new long-run equilibrium
point 3, each firm will produce 600 units of output and there will then be 150 firms in the industry to
produce the industry equilibrium output of 90,000 units.