Question

9)If the market starts in equilibrium at point E0 in panel (b), and demand increases, in the long run (assume firms have similar costs and new firms do not affect resource prices):

MGLT ACLT P - \--- - ------- po - - - T - - - - - - - - - 7a 70 90 91 - Qi Q2 Q3

( ) New firms will enter

( ) The price will fall back to PO

( ) Firms will earn zero economic profits

( ) All of the above are correct.

10)If the new firms that enter the market cause an increase in the demand for resources which then induces an increase in the price of the resources, which of the following is most likely to arise?

( ) The long-run market supply curve will be upward sloping.

( ) There will be producers surplus in the long run for low cost firms

( ) The marginal firm is the only firm making zero economic profits

( ) All of the above are likely to arise.

Answer 1

9) all of the options are correct. increase in demand will increase the price in the short run which will bring economic profit for the existing firms. in the long run new firms will be attracted by this profit and as the enter the market the supply will increase which brings the price level down to the same level. And therefore there will be no economic profit in the long run

10) all of these are correct. because for the new firms the resource cost is increased the cost of production also increases. Cost of production for existing firms remains unchanged. This indicates that long run will have upward sloping supply function indicating increasing cost industry..