12. Describe how each of the following shocks would affect price (P), aggregate
ID: 1245001 • Letter: 1
Question
12. Describe how each of the following shocks would affect price (P), aggregate sales volume (Q), and the output level of individual sellers (q) in a perfectly competitive, constant cost industry in both the short run and long run. Be sure to clearly indicate the predicted direction of change for each variable in both the short run and long run, and to illustrate your predictions with the appropriate diagrams. a. A technological advance increases the marginal product of labor at each level of labor employment. b. A recession decreases average buyer income. Assume the good is a normal good. c. The government imposes a lump sum annual fee on all producers.Explanation / Answer
A) technological advancement will reduce the price , increase the sales volume and the output of each individual sellers in the perfectly competitive market. Due to that reason sellers will be able to earn higher profits. Profits will increase in the short run, but as the new firms will try to enter as seeking an opportunity to earn profits, the profits will be back to normal in the long run. B) As recession will hit, it will decrease average buyer's income, thus the normal good will not be demanded that much now as buyers will shift towards using the inferior good. The affect on price is one point which will be uncertain, but due to the decrease of demand the sales volume will decrease, thus the overall put level will also decrease due to the fact that the good is normal and buyers are shifted their consumption towards cheaper and inferior goods. The market will face a point where it will seen in a loss. These losses will be seen in the short run, but as firms will leave the market, the profits will start to rise and they will be normal in the long run. C) The imposement of lump sum fee will reduce profits of the sellers, thus they will try to shift this burden on the consumers, so the price will increase, sales volume will fall a little bit due to extra fees to be paid and the output of individual sellers in the perfectly competitive market will fall in the short run and the long run.
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