True, false or uncertain? Justify your response to the following statements. Sup

Question

True, false or uncertain? Justify your response to the following statements.

Suppose that economic base of The City is experiencing a change in technology. Suppose that the dominant local industry, which produces something needed by all other local industries, used to display increasing returns to scale. The new technology reduces the average cost of production (given the current level of production) and displays constant returns to scale.

a) Would this change in technology affect the equilibrium size of the city?  

b) Would the profit earned by local companies in other industries in equilibrium increase, decrease or stay the same because of the change in technology in the dominant industry?

Explanation / Answer

a) The equilibrium size of the dominant firm will be effected, rather we can say that it will increase so the equilibrium size of the city will also increase because the question tells us that at the current level of production, cost has gone down and so the demand will increase that will increase the equilibrium size also.

b) Yes the profits will increase because to buy the same amount of inputs as before, they have to pay less as cost of production has gone down.

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