2008 Micro FRQ #1
(A) Draw a clearly labeled side-by-side graph for the apple market and Callahan's Orchard, and show,
(i) Market output & price
(ii) Callahan's output & price
(B) Now assume that the Government provides farm support to apple growers by granting an annual lump-sum subsidy all apple growers. Indicate the effect the subsidy would have on each of the following. ((In the Short-Run))
(i) Callahan's (firms) output and quantity
Lump sums do not affect the marginal costs (no change in quantity or price)
Perfect Competition Cheat Sheet, Here.
(ii) Callahan's Profit
Profit will increase.
(iii) The number of firms in the industry.
The number of firms will only increase in the long-run, never in the short run.
(C) Indicate how each of the following will change in the ((long-run)) due to the subsidy.
(i) Number of firms in the industry.
In the short-run due to the lump-sum subsidy Callahan has a profit, firms in the industry are attracted to the profits and enter the industry.
As firms enter the industry they will push the price down.
(iii) Industry Output
Industry Output will increase as there are more firms producing more goods
Earlier post with some more coverage, here.