Suppose the book-printing industry is competitive and begins in a long-run equil

Question

Suppose the book-printing industry is competitive and begins in a long-run equilibrium. Then Hi-Tech Printing Company invents a new process that sharply reduces the cost of printing books.

Suppose Hi-Tech’s patent prevents other firms from using the new technology.

Complete the following table with the effect this new technology has on each of the following elements.

Component Effect Hi-Tech’s marginal-cost curve    Hi-Tech’s average-total-cost curve    Price of books in the short run    Hi Tech’s profits   

Explanation / Answer

1. Hi-tech's MC curve will shift downward. Because the new technology will reduce the average variable cost of producing books in terms of reduction of labor cost, electricity cost, etc.

2. Hi-tech's ATC curve will shift downward. ATC is the sum of AFC and AVC. Since AVC decreases, the ATC will decrease. This leads to a downward shift in ATC Curve.

3. Price will remain same. Because it is a competitive industry. Price is determined by the demand and supply forces in the industry. Here, individual firms are price takers. They can not influence the price of the good.

4. Profit will increase. Profit is the difference between Total revenue and Total cost. Since TC decrease, profit will increase.

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