Suppose the costs of production in a competitive market fall by $1 per unit at e

Question

Suppose the costs of production in a competitive market fall by $1 per unit at every output level. Assume the number of firms is fixed in the short run but not in the long run.

a. How would such a change affect the market equilibrium in the short run?

b. How would such a change affect the market equilibrium in the long run?

Equilibrium price increases and equilibrium quantity decreases; profits are negative. Neither equilibrium price nor equilibrium quantity changes; profits are positive. Equilibrium price does not change and equilibrium quantity increases; profits are positive. Equilibrium price increases and equilibrium quantity does not change; profits are negative. Equilibrium price decreases and equilibrium quantity increases; profits are positive.

Explanation / Answer

a.Neither equilibrium price nor equilibrium quantity changes; profits are positive.

b.Price decreases and quantity increases; profits equal zero.

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