Assume that you are hired as an analyst at a major New York consulting firm. You first
assignment is to do an industry analysis of the tribble industry. After extensive research and two
all-nighters, you have obtained the following information:
- Long-run costs:
Capital costs: $5 per unit of output
Labor costs: $2 per unit of output
- No economies or diseconomies of scale
- Industry currently earning a normal return to capital (profit is zero)
- Industry perfectly competitive, with each of 100 firms producing the same amount of output.
- Total industry output: 1.2 million tribbles
- Demand for tribbles is expected to grow rapidly over the next few year sto a level twice as
high as it is now, but (due to short-run diminishing returns) each of the 100 existing firms is
likely to be producing only 50 percent more.
a. Sketch the long-run cost curve of a representative firm.
b. Show the current conditions by drawing two diagrams, one showing the industry and
one showing a representative firm.
c. Sketch the increase in demand and show how the industry is likely to respond in the
short run and in the long run.
Answers
Answer:
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Principles of Microeconomics Plus NEW MyEconLab with Pearson eText -- Access Card Package (11th) edition 133450872 9780133450873
Principles of Microeconomics Plus NEW MyEconLab with Pearson eText -- Access Card Package
(11th Edition)
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This problem has been solved:
Assume that you are hired as an analyst at a major New York consulting firm. Your first assignment is to do an industry analysis of the tribble industry. After extensive research and two all-nighters, you have obtained the following information:
■ Long-run costs:
Capital costs: $5 per unit of output Labor costs: $2 per unit of output
■ No economies or diseconomies of scale
■ Industry currently earning a normal return to capital (profit of zero)
■ Industry perfectly competitive, with each of 100 firms producing the same amount of output
■ Total industry output: 1.2 million tribbles
Demand for tribbles is expected to grow rapidly over the next few years to a level twice as high as it is now, but (due to short-run diminishing returns) each of the 100 existing firms is likely to be producing only 50 percent more.
a. Sketch the long-run cost curve of a representative firm.
b. Show the current conditions by drawing two diagrams, one showing the industry and one showing a representative firm.
c. Sketch the increase in demand and show how the industry is likely to respond in the short run and in the long run.
Step-by-step solution:
Step 1 of 3
a) The long run average cost curve for a representative firm is sketched below. It is the red curve labeled as LRAC. Each individual firm chooses a scale of operations that minimized its long-run average cost which is when the short run marginal cost curve (SRMC) intersects with short run average costs (SRAC) and long run average cost (LRAC). The reason why an individual firm’s output is 12,000 is that there are 100 firms producing the same amount of output. Therefore, 1.2 million divided by 100 is 12,000.
b) The first graph shows the current condition of the industry’s demand and supply levels. The second graph shows the current condition of a representative firm. The reason why an individual firm’s output is 12,000 is that there are 100 firms producing the same amount of output. Therefore, 1.2 million divided by 100 is 12,000.
Chapter 9, Problem 15P is solved.
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Principles of Microeconomics Plus NEW MyEconLab with Pearson EText -- Access Card Package (11th) edition 9780133450873 133450872
Principles of Microeconomics Plus NEW MyEconLab with Pearson eText -- Access Card Package | 11th Edition
9780133450873ISBN-13: 0133450872ISBN: Sharon E Oster, Karl E. Case, Sharon Oster, Ray C Fair, Ray C Fair, Karl E CaseAuthors: Rent | Buy
This is an alternate ISBN. View the primary ISBN for: Principles of Microeconomics 11th Edition Textbook Solutions
Principles of Microeconomics Plus NEW MyEconLab with Pearson eText -- Access Card Package
(11th Edition)
Solutions for Chapter 9 Problem 15P
Problem 15P: Assume that you are hired as an analyst at a major New York ...
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