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

Explanation:

When the company invents a new process that sharply reduces the cost of printing books, it means MC (i.e. the cost of producing an additional book) and ATC (i.e. per unit cost) will decrease which will lead to a downard shift in these two curves.

Since it is a competitive industry, price is determined by the demand and supply forces in the industry. Individual farms are price takers. So, price will not change.

Profit = TR - TC

Since, price remains unchanged and ATC decreases, profit will increase.

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

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