Day care is provided by a competitive constant-cost industry at a price of $40 p

Question

Day care is provided by a competitive constant-cost industry at a price of $40 per child per day. The government wants to increase the availability of day care and thus chooses to build and operate 50 new day care centers across the nation. a. In the short run, what happens to the price of day care? Does the total amount of day care provided increase in the short run? What happens to the profits of day care centers? b. In the long run, what happens to the size of the day care industry? What happens to the price of day care and the profits of day care centers? Does the total amount of day care provided increase in the long run?

Explanation / Answer

IN short run, with the effect of new operate 50 new day care centress across the nation, the total amount of day care increase in the short run and price of day care falls and equilbruim quantity of day care rises. the profits of per day reduced and day care earn negative profits because of the price has been fall or in other words the profit is reduced because the price has reduced from break even price that is $40 per child per day.

In long run , with the effect of short run negative profit, some existing firm will exit the industry . then the price will come to original $40 per child per day. and the profits of child industry will be zero. with the exit of firm industry, the total amount of per day provided come back to its original equilbruim level. therefore, the government oriented will add nothing in the long run in the child day care industry.

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