15) Consider an industry populated by identical firms, facing constant input pri
ID: 1129247 • Letter: 1
Question
15) Consider an industry populated by identical firms, facing constant input prices, and having all the other characteristics of a perfectly competitive market. Which of the following statements describes the new long-run market equilibrium resulting from a shift in demand? A) a shift in demand has no effect on the long-run average cost and so there is no change in equilibrium price and quantity B) a shift in demand will change the equilibrium price and quantity C) a shift in demand has no effect on the long-run average cost, resulting in change in equilibrium quantity but not price. D) a shift in demand has no effect on the long-run average cost, resulting in change in equilibrium price but not quantity E) a shift in demand is not possibleExplanation / Answer
(15) (B)
A rise (fall) in demand will shift the market demand curve to the right (left) which will increase (decrease) market price and market quantity. Since firms maximize profit by equating market price with their marginal cost, ceteis pribus this will increase (decrease) their quantity.
(16) (C)
(17) (E)
Precise area for consumer surplus for monopoly is not marked in graph.
(18) (D)
Profit is maximized when MR = MC
p = 90 - 2Q
Total revenue (TR) = p x Q = 90Q - 2Q2
MR = dTR/dQ = 90 - 4Q
MC = dTC/dQ = 10 + 4Q
90 - 4Q = 10 + 4Q
8Q = 80
Q = 10
p = 90 - (2 x 10) = 90 - 20 = 70
TR = 70 x 10 = 700
TC = 100 + (10 x 10) + (2 x 10 x 10) = 100 + 100 + 200 = 400
Profit = TR - TC = 700 - 400 = 300
(19) (E)
When Price is higher (lower) than AC, firm incures economic profit (loss), but firm does not shut down as long as price is higher than minimum AVC.
(20) (A)
When MR is higher (lower) than MC, firm incurs a marginal profit (loss) which can be increased (decreased) by increasing (decreasing) output.
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