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Create a pair of graphs to show an perfectly competitive industry and firm in long-run equilibrium. Put the graphs side by side and use the same vertical scale for both graphs.

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  1. Create a pair of graphs to show an perfectly competitive industry and firm in long-run equilibrium. Put the graphs side by side and use the same vertical scale for both graphs.

    1. The left-hand side should show the supply and demand for the product. The equilibrium price is $50 and the equilibrium quantity is 10 billion units per week.

    2. The right-hand side should show the average total cost, marginal cost, and demand curves facing the individual firm. The profit maximizing quantity is 2,000 units per week.

  2. Demand

    1. Increases

  3. Show the impact in the short run of the change in demand on your graph.

  4. What happens to the equilibrium price and quantity in the market in the short run?

    1. Both price and quantity increase

    2. Both price and quantity decrease

    3. Price increases and quantity decreases

    4. Price decreases and quantity increases

  5. What happens to the profit maximizing quantity in the short run?

    1. Quantity increases

    2. Quantity decreases

    3. Quantity remains constant

  6. What happens to the number of firms in the market in the long run?

    1. Number increases

    2. Number decreases

    3. Number remains constant

  7. Use your graph to show what, if anything, happens in the long run. Assume that the costs curves do not shift.

  8. The long-run equilibrium price is

    1. Greater than the price in the short run

    2. Less than the price in the short run

    3. Equal to the price in the short run

  9. The long-run equilibrium price is

    1. Greater than the initial price

    2. Less than the initial price

    3. Equal to the initial price.

      8. What allows a monopoly to earn economic profit in the long run?

        1. Market power which makes the demand facing the firm have a negative slope

        2. Barriers to entry which keep competitors from entering the market

        3. Both a and b

        4. Neither a or b

      Explain why your answer is correct

      9. Why does the demand facing a monopoly have a negative slope while the demand facing a perfect competitor has no slope?

      10. Would the only cable TV provider in an area be a monopoly? List the characteristics of monopoly and explain how the firm meets or fails to meet each characteristic.

      Questions

      10. Which output is greater?

        1. A perfectly competitive industry

        2. A monopoly

      Assume that all firms maximize profit and have access to the same U-shaped average total cost curve.

      11. In your own words, explain what the deadweight loss of a monopoly is and why the competitive output is better..