Task: Assume that the perfectly competitive widget industry consist of exactly 1,000 firms and is initially in a long run equilibrium. Assume that the widget industry is a constant cost industry and, for simplicity, assume that there is only one plant size available. Subsequently, a permanent increase in price of a gadget (a substitute in consumption for a widget) occurs.
Question 1. Provide two carefully labeled graphs, one that shows (i) the initial long run equilibrium in the widget industry and another one that shows (ii) the initial long run equilibrium for the typical firm in the widget industry. Label the initial equilibrium points (1). Your graphs should be large enough for you to add shifts of curves, new eqiulilbria and new labeling as you work through the subsequent questions. Your two graphs should be drawn side by side.
Question 2. On each of the graphs, show the short run effect of the permanent increase in price of a widget. Label the short run equilibrium point (2). Use arrows to show any shifts of curves or movements along curves and label any sequential curves with numerical subscripts (e.g. S1, S2, etc.)
Question 3. On each of the graphs, show the long run effect of the permanent increase in price of a widget. Label the short run equilibrium point (2). Use arrows to show any shifts of curves or movements along curves and label any sequential curves with numerical subscripts (e.g. S1, S2, etc.)