Help!!! 5. Day care is provided by a competitive constant-cost industry at a pri

Question

Help!!! 5. Day care is provided by a competitive constant-cost industry at a price of S40 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? 9. Assume that the spaghetti industry is perfectly competitive and that all spaghetti manufacturers are identical. Also assume that the price of durum wheat, which is used in the production of spaghetti, rises the more spaghetti producers there are. Show what happens to the price of spaghetti in the short run and the long run after there is an increase in the demand for spaghetti.

Explanation / Answer

Ans. Since government wants to increase the availability of day care and thus chooses to build and operate new day care facilities across the nation.

a) In the short run, the prices of day care will decrease due to pressure from government operated day care facilities as supplies of facilities has now increased. Yes, the total amount of day care provided increases in a short run. The profits will decrease in a short term as the competitive firms will not be able to compete with government owned firms.

b) In the long run, the size of the day care industry will grow considerably as more people will demand these services in the long term. As the time increases in the day care facilities, the prices will come down as there will be more demand and thus to fulfill that demand more day care facilities will be opened in the future which will keep pressure on the price. While prices will not increases but the profits of the day care facilities will increase in the long term as demand will increase and thus the profits will increase. Yes, the total amount of day care provided will increase in a long term.

9. In the short term the prices of spaghetti will increase because of increase in prices of raw materials but in the long term the prices will get stabilize.

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