1. Suppose a competitive industry in in long-run equilibrium; then the price of
ID: 1203222 • Letter: 1
Question
1. Suppose a competitive industry in in long-run equilibrium; then the price of a substitute good (in consumption) decreases. What happens in the short run?
a. The market demand curve?
b. The market supply curve?
c. Market price?
d. Market output?
e. The firm’s output?
f. The firm’s profit?
g. In the short run?
2. Anti-trust authorities at the Federal Trade Commission are reviewing your company’s recent merger with a rival firm. The FTC is concerned that the merger of two rival firms in the same market will increase market power. A hearing is scheduled for your company to present arguments that your firm has not increased its market power through this merger. Can you do this? How? What evidence might you bring to the hearing?
Explanation / Answer
(1) In the short run,
(a) Lower price of substitute will decrease the demand for the good. So, market demand will fall & market demand curve shifts left.
(b) Firms cannot adjust production in response to lower demand in short run. So, market supply is unchanged & market supply curve remains the same.
(c) As market supply curve is fixed but market demand curve shifts left, market price decreases.
(d) Lower market demand decreases market output.
(e) Lower market demand decreases the demand for (and output of) individual firms.
(f) Lower quantity demanded and lower price for firm's output lowers profit, ceteris paribus.
NOTE: First question is answered.
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