Be sure to label the graphs. Suppose in the competitive market for a good known as “Tovars” that there are 5,000 firms.Assuming each firm is at a point where P=ATC. Suddenly, a huge number of entrepreneurs entersthe market so the number of firms increases by 1,000. a.Please draw a graph showing the short run effect. Please label the price and quantities initiallyas P1, q1, Q1and the short run price and quantities as P2, q2, Q2 b. On the graph in a, please show the long run effect. Please label the long run price and quantitiesas P3, q3, Q3.Relative to the initial equilibrium (before the entrance of 1,000 firms),What happens to the P?What happens to the q?What happens to the Q?

Question
Asked Nov 27, 2019
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Be sure to label the graphs.
 
Suppose in the competitive market for a good known as “Tovars” that there are 5,000 firms.
Assuming each firm is at a point where P=ATC. Suddenly, a huge number of entrepreneurs enters
the market so the number of firms increases by 1,000.
 
a.
Please draw a graph showing the short run effect. Please label the price and quantities initially
as P1, q1, Q1
and the short run price and quantities as P2, q2, Q2
 
b. On the graph in a, please show the long run effect. Please label the long run price and quantities
as P3, q3, Q3.
Relative to the initial equilibrium (before the entrance of 1,000 firms),
What happens to the P?
What happens to the q?
What happens to the Q?
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Expert Answer

Step 1

a. The short run effect of perfectly competitive firm can be illustrate as follows:

МC
So
АТС
P2
P2
P1
P1
2 Q1
ql q2
Industry
Firm
Figure 1
help_outline

Image Transcriptionclose

МC So АТС P2 P2 P1 P1 2 Q1 ql q2 Industry Firm Figure 1

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Step 2

In the figure, vertical axis represents quantity and horizontal axis represents price. Panel A shows perfectly competitive industry and panel B shows, perfectly competitive in short run.  It is give that there are 5000 firms and producing at P=ATC, where price is Po, quantity of industry is Q1 and quantity of firm is q1. When firms exit from the industry, the supply of goods and services will decreases and thereby the supply curve will shift to the left from S0 to S1. As a result, the price will increase as P2, quantity of industry decrease as Q2 and quantity of firm decrease as q2 in the short run. Thus, exit of firms will leads to increase in rice and decrease in quantity of both industry and firm.

Step 3

b. The long run impact of exist of firm...

So
S1
P2
Do
Quantity
Q3 Q2 Q1
Figure 2
Price
help_outline

Image Transcriptionclose

So S1 P2 Do Quantity Q3 Q2 Q1 Figure 2 Price

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