Transcript PowerPoint File

Economics 310
Price Theory
Chapters 5 and 6-Pop Quiz.
Department of Economics
College of Business and Economics
California State University-Northridge
Professor Kenneth Ng
Tuesday, April 12, 2016
Pop Quiz

Question 1. This graph shows changes in the market price
and industry output of a good over time. Assume that at C and
D all short and long run adjustments have been made.
A. What could cause the market price and output to change
in the manner depicted below? Depict such a change on
your graph. (hint: more than one thing may happen).
B. Label points A, B, C and D on both graphs. Provide a brief
narrative of the short and long run changes among firms.
C. Draw the long run industry supply curve. Is the industry an
increasing cost, constant cost, or decreasing cost
industry? Explain.
Answer A
Demand increases, the market price rises, existing firms increase output by
setting output where the new price, P3, equals MC. The existing firms are
making money because P > min ATC.
Market
Firm
Price
Price
MC ATC
S1
P3
A
P1
P1
D
2
D1
0
Quantity
(firm)
0
Q1
Quantity
(market)
Answer B
Because the existing firms are making money by selling at a price P3, new firms
enter the market. As firms enter the market, the short run supply curve shifts to
the right. Because there are more firms, more output is produced at every price
and the price falls. At point B, the long run adjustment in the the number of
firms has begun but has not been completed.
Market
Firm
Price
Price
MC ATC
P3
A
P1
B
C
P1
D
2
D1
0
Quantity
(firm)
0
Q1
Quantity
(market)
The industry is an increasing cost industry and has an upward sloping long run
supply curve because in May, after all long run adjustments have occurred, the
price has not fallen back to P1.
Answer C
In May, demand decreased from D2 to D3. This causes the market price to fall.
The existing firms setting P=MC decrease output. Because the new price is
below the min ATC of production firms will exit the industry.
Market
Firm
Price
Price
MC ATC
P3
A
P1
C
P1
D
2
P2
0
Quantity
(firm)
0
Q1
D
3
D1
Quantity
(market)
Answer D
Because existing firms are losing money, firms will exit the industry. As firms
exit, the short run supply curve shifts to the left. At any price less is produced
because there are fewer firms in the industry. Eventually, the price rises until the
least efficient producer is breaking even. Since a point D, the price has not
returned to P1, the industry is an increasing cost industry.
Market
Firm
Price
Price
MC ATC
P3
A
P1
0
P1
Quantity
(firm)
0
C
D
2
D
Q1
D
3
D1
Quantity
(market)
Answer A
Demand increases, the market price rises, existing firms increase output by
setting output where the new price, P3, equals MC. The existing firms are
making money because P > min ATC.
Market
Firm
Price
Price
A
MC ATC
P3
S1
A
P1
P1
D
2
D1
0
Quantity
(firm)
0
Q1
Quantity
(market)
Answer B
Because the existing firms are making money by selling at a price P3, new firms enter
the market. As firms enter the market, the short run supply curve shifts to the right.
Because there are more firms, more output is produced at every price and the price
falls. Firms continue to enter until potential entrants are no longer able to make a
profit. This occurs when the price has returned to P1,, therefore this a constant cost
industry.
Market
Firm
Price
Price
MC ATC
P3
A
P1
P1
C
D
2
D1
0
Quantity
(firm)
0
Q1
Quantity
(market)
The industry is a constant cost industry and has a flat long run supply curve
because in May, after all long run adjustments have occurred, the price has fallen
back to P1.
Answer C
In May, demand decreased from D2 to D3. This causes the market price to fall.
The existing firms setting P=MC decrease output. Because the new price is
below the min ATC of production firms will exit the industry. The market has only
partially adjusted at B.
Market
Firm
Price
Price
MC ATC
P3
A
P1
C
P1
D
2
B
0
Quantity
(firm)
0
Q1
D
3
D1
Quantity
(market)
Answer D
Because existing firms are losing money, firms will exit the industry. As firms
exit, the short run supply curve shifts to the left. At any price less is produced
because there are fewer firms in the industry. Eventually, the price rises until the
least efficient producer is breaking even. Since a point D, the price has returned
to P1, the industry is a constant cost industry. 1
Market
Firm
Price
Price
MC ATC
P3
A
P1
P1
AVC
0
Quantity
(firm)
0
C
D
D
2
Q1
D
3
D1
Quantity
(market)