Homework 6 Answers. Question 1: Which is not a characteristic of a perfectly competitive industry? _B__ a. Marginal revenue is equal to the market price b. Products from different firms in the industry are complements c. Firms can easily enter and/or exit the industry (in the long run)
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MR=MC. Cost of last unit produced is exactly equal to what buyers are willing to pay for it
b. What are the benefits to society as a whole of competitive equilibrium in the long run?
Output is produced in the least cost way (P=min LAC). Producers earn only normal profit so that all benefits are captured by consumers
Question 5. On the following graph of a firm’s costs in the short run, label the curves and indicate the supply function using a heavier line or different color ink
Question 7 Suppose that bicycles are produced by a perfectly competitive, constant cost industry. Which of the following will have a larger effect on the long-run price of bicycles: 1) a government program to advertise the health benefits of bicycling or 2) a government program that increases the demand for steel, an input into the manufacture of bicycles that is produced in an increasing cost industry? Briefly explain why.
Program that raises price of steel: The result will be a shift in the long-run supply curve. Price of bicycles will increase and quantity will decrease.
Question 9 The government of Philadelphia is currently debating whether they should implement a tax on soda. The hourly supply function for soda is P = 1+ .5QS and the hourly demand function is P = 20-1.5QD. Suppose the government is considering a tax of $4 on each unit that the supplier sells.
Graph the supply and demand functions for soda in the space below (on the same graph
Stax = 5+.5Q
Tax born by consumers
Tax born by producers
Ps = 4.75