Answered: Assume that pencils are manufactured in…

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter22: Perfect Competition

Section: Chapter Questions

Problem 4QP

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Assume that pencils are manufactured in a perfectly competitive market that is in long-run equilibrium. (a) Draw correctly labeled side-by-side graphs for the brooms market and for a representative firm and show each of the following.: (i) The market price and quantity, labeled PM and QM, respectively (ii) The firm's profit-maximizing price and quantity, labeled Pp and Qp, respectively (b) What is the relationship between PM and Pp? Explain in words. ( c) Rent on the factory building is an important fixed cost in the production of pencils, and the industry experiences significant increases in rent. (i) What will happen to the firm's profit-maximizing quantity in the short run? Explain. (ii) On your graph in part (a), show the impact of the rent increase and completely shade the area representing the firm's profit or loss in the short run. ( d) As a result of the rent increase, what will happen to each of the following in the long run? (i) The number of firms in the market. Explain. (ii) The market equilibrium quantity relative to QM and the market equilibrium price relative to PM. Explain

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