bagel restaurants or cranberry production Essay example

1543 WordsOct 13, 20137 Pages
1. (5 points) A constant cost industry is one in which the LRMC for the industry is constant. An increasing cost industry is one in which the LRMC for the industry is increasing. Which is more likely to be a constant cost industry: bagel restaurants or cranberry production? Explain. What does this imply about the slopes of the long-run supply curves in these industries? In this article, the bagel industry closely resembles a constant cost industry. A constant cost industry is a perfectly competitive industry that gives a horizontal long run industry supply curve. The slope for this supply curve is infinity. The expansion of the industry causes no change in the production cost. The entry of new firms, driven by an increase in demand…show more content…
Thus, the long run average cost does not change. As mentioned above, minimum efficient scale will still be the same. The industry can always produce the extra quantity at the same unit of cost. The new equilibrium price is the same as the old equilibrium price, only the quantity has changed. However, in the article, the supply curve shifted a little bit more to the right bringing the price down from .5 cents to .45. Nonetheless, the bagel industry portrayed in the article showed a close resemblance of a constant cost industry primarily driven by the freedom to enter and exit the market without much hurdle cost. 2. (5 points) Upward sloping supply curves imply that some firms would still produce the product if the price were lower. Does this imply that some firms in such an industry must be making economic profits? Explain. (Note: you might want to read pp. 256-259 of the textbook for help in answering this question.) Economic Profit is the difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. In the long run, firms in a perfectly competitive industry will not make economic profit. The graph below illustrates that there are no economic profits. The left graph illustrates the long-run supply decision of George Bailey’s bagel restaurant, a representative firm in the industry. At Price P*0 George Bailey’s bagel restaurant is earning an economic profit. George Bailey was

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