13. Envelope Curve III Consider a perfectly competitive increasing-cost industry with n identical firms. Starting from long run industry equilibrium, use diagrams for the market and for a representative firm to illustrate the effect of a one-time, unexpected, permanent increase in market demand from Di to D2. a. Show the short run equilibrium (in both diagrams) after the increase in demand. b. Show the long run equilibrium (in both diagrams). c. What happens to price in the short run? In the long run?
13. Envelope Curve III Consider a perfectly competitive increasing-cost industry with n identical firms. Starting from long run industry equilibrium, use diagrams for the market and for a representative firm to illustrate the effect of a one-time, unexpected, permanent increase in market demand from Di to D2. a. Show the short run equilibrium (in both diagrams) after the increase in demand. b. Show the long run equilibrium (in both diagrams). c. What happens to price in the short run? In the long run?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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13. Envelope Curve III
Consider a perfectly competitive increasing-cost industry with n identical firms. Starting
from long run industry equilibrium, use diagrams for the market and for a representative
firm to illustrate the effect of a one-time, unexpected, permanent increase in market
demand from Di to D2.
a. Show the short run equilibrium (in both diagrams) after the increase in demand.
b. Show the long run equilibrium (in both diagrams).
c. What happens to price in the short run? In the long run?
d. What happens to the quantity sold by the firm in the short run? In the long run?
f. What happens to profit in the short run? What is the industry response? What
happens to profit in the long run?
f. What happens to the number of firms in the short run? In the long run?
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