Question

7. You run a small lawn-care business mowing people's lawns in Ann Arbor. There are lots of other similar companies, basically no differentiation in service, and the barriers to entry and exit are very low.

Suppose that this market begins in a long-run competitive equilibrium. Then, due to an ongoing droughts, demand for lawn care declines.

Now, suppose there are no further shocks to the lawn-care market so that things eventually adjust back to a new long-run competitive equilibrium. In this new long-run equilibrium, what will be true about the following variables? (All compared to the initial starting point before the shock.)

1. Market price_______________ (select one) (will go up, will go down, will remain unchanged, cannot be determined)
2. Market quantity of lawns mowed _____________   (select one) (will go up, will go down, will remain unchanged, cannot be determined
3. Individual quantity of lawns mowed by each existing company______________ (select one) (will go up, will go down, will remain unchanged, cannot be determined)
4. Profits of each existing company __________________ (select one) (will go up, will go down, will remain unchanged, cannot be determine
5. Number of companies ________________(select on (will go up, will go down, will remain unchanged, cannot be determined)

Answer 1

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