Question: Consider the market for psychic readings. Assume that psychic readings are given (produced) by a number of undistinguishable psychics, which act like separate and identical firms. These psychics all behave as price takers and are able to adjust all of their inputs quickly (thus they are always producing on their long-run cost curves). Because of extensive and likely excessive educational and certification requirements established by the Psychics' Union, entry of new psychics to the market takes time. Thus, in the short run, price can rise above minimum long-run average cost. Assume that each psychic's cost function is given by:
C (q) = 50q3 - 150q2 + 150q
a. After Lady Gaga announced that she regularly visits psychics, demand for psychic readings skyrockets. Suppose that in period 1 we observe a market clearing price of $150 and a total of 16,000 psychic readings sold. Use the fact that each psychic acts as a price taker to determine the number of psychics in the market in period 1, the number of psychic readings produced by each psychic, and each psychic's profit.
b. The presence of positive profits in the psychic industry induces entry, and by period 2 enough psychics have gotten the education and certification to return the market to it long-run equilibrium. What is the price of psychic readings in period 2? What are psychic profits? Assuming we see 24,000 psychic readings sold in period 2, how many psychics are now in the market?
c. Sketch out the Long-Run MC, AC and Profit curves for individual psychic in this market.
d. What incentive did the Psychics' Union have to lobby for the educational and certification requirements (regulations)?