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ECO-6655: Application Problem Set 5 SOLUTIONS, T5-1 !r" !ominic #" $ina%eo
: N>1((A - A
'
- 15(,(((
: >1((&'(5(* - &'(5(*
'
- 15(,(((
: @,>(5,((( - >,'(',5(( - 15(,((( : <>,(5',5((
B. Based on your results in 2art A and assuming the firm operates in a monopolistically competitive
industry, explain what will happen to this industry in the long run; No, t+e 1irm i) not in lon--r,n
e3,ilibri,m )ince it i) earnin- ),b)tantial economic pro1it) at pre)ent" T+e)e pro1it) .ill attract
ne. 1irm) to t+e lan%)capin- in%,)tr0, .+ic+ .ill attract b,)ine)) a.a0 1rom ;4; an% )+i1t
;4;C) %eman% c,r/e le1t.ar% o/er time &i"e", t+eir mar2et )+are .ill 1all*" T+i) entr0 .ill
contin,e ,ntil ;4;C) economic pro1it) are eliminate%"
C. Determine the output level, price, and profits that will occur in long'run e*uilibrium. Assume a
high'price, low'output scenario assuming a parallel shift of the firm<s demand curve. Be sure to
explain what you are doing and why. =int6 ,he slope of the A,C curve is '7189,9990:
%
.
Step 1: In t+i) problem, t+e ori-inal %eman% c,r/e .ritten in term) o1 P : >5(( - A, )o .e nee%
to re.rite t+e ori-inal %eman% c,r/e in term) o1 A, or A : >5(( - P" T+i) mean) t+e )lope o1 t+e
%eman% c,r/e i) -1 an% t+e ori-inal intercept i) >5((" #,rt+ermore, t+e problem )peci1ie) a
parallel )+i1t o1 t+e %eman% c,r/e, )o t+e ne. %eman% c,r/e intercept c+an-e) b,t t+e )lope
remain) t+e )ame" 4e %o not nee% to %etermine t+e intercept at t+i) point beca,)e .e are onl0
intere)te% in t+e )lope o1 t+e %eman% c,r/e to )ol/e t+i) problem"
Step ': #in% t+e point o1 tan-enc0 bet.een t+e ATC c,r/e an% t+e %eman% c,r/e" T+i) occ,r)
.+ere t+e )lope o1 t+e ATC c,r/e &: -<15(,(((EA
'
* e3,al) t+e )lope o1 t+e ne. %eman% c,r/e:
)lope o1 co)t c,r/e : ne. %eman% c,r/e )lope
-<15(,(((EA
'
: -1
A
'
: 15(,(((
A : )3,are root o1 15(,((( : @="'?@ ,nit)"
Step : In lon--r,n e3,ilibri,m, P : AC:
P : AC : TCEA
: &15(,((( N >((A*EA : 15(,(((EA N >((
: 15(,(((E@="'?@ N >(( : @="'?@ N >(( : <=@="'?@
Step >: In t+e lon- r,n, pro1it) are 8ero" To pro/e t+i):
Pro1it : T9 - TC : PA - 15(,((( - >((A
: &=@="'?@*D@="'?@ - 15(,((( - >((&@="'?@*
: (>,?1?" - 15(,((( - 15>,?1?" : 8ero
Cote6 If you got a small positive number it li5ely is due to rounding error.
D. Calculate B"B)s new long'run e*uilibrium demand curve.
In or%er to -et t+e ne. %eman% c,r/e, .e6ll nee% to %etermine t+e intercept" 4e 2no. t+at one point
on t+e %eman% c,r/e alrea%0 i) P : @=" an% A : @=", an% .e al)o 2no. t+at %eman% c,r/e) are o1
t+e 1orm A : a - bP, an% .e alrea%0 %etermine% t+at b : -1 1rom part ;"
S,b)tit,tin- t+e)e /al,e): @=" : a - =@=", t+en a : 11=>"6" T+ere1ore, A : 11=>"6 - P i) ;4;C)
ne. %eman% c,r/e"
>
ECO-6655: Application Problem Set 5 SOLUTIONS, T5-1 !r" !ominic #" $ina%eo
Alternati/el0, t+e in/er)e %eman% c,r/e .ritten in term) o1 P : 11=>"6 - A" Notice t+at t+e intercept
term +a) %ecrea)e% ),b)tantiall0 1rom t+e ori-inal one &P : >5(( - A*, in%icatin- a mar2e% le1t.ar%
)+i1t o1 t+e c,r/e %,e to mar2et entr0"
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