The price of peaches goes up and I observe you buying more strawberries. This implies that strawberries must be an inferior good.
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Suppose all firms in a perfectly competitive industry have production processes characterized by the production function . Suppose the cost of labor is 20 and the cost of capital is 10.
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Suppose all firms in an industry have a production technology described by the production function . The cost of labor is 2 and the cost of capital is 4, and each firm faces a recurring fixed cost of 300.
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Suppose gasoline stations operate with identical costs in a perfectly competitive industry. In each of the following cases, explain what happens to an individual gasoline station and what happens to the overall quantity of gasoline sold in the short and long run. Assume that labor is the only variable input in the short run.
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Currently. the price of consuming housing is lowered by the fact that home mortgage interest is tax deductible. Suppose the government proposed to eliminate this implicit subsidy of your housing consumption, raising the price from to . At the same time, the government lowers the tax on other consumption, lowering the price from to .
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In a competitive industry, each firm has a cost function (for a given set of input prices). Demand for the industry’s output is . The (long run) equilibrium number of firms is
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Suppose you are Joe — one of many souvenir shop owners in a town centered around tourism. All souvenir shop owners face the same decreasing returns to scale production technology as well as recurring annual fixed costs, and they all sell a single local novelty x that is identical across all shops. Assume at the outset of each part below that the souvenir shop market in this town is in long run equilibrium and treat each part separately – i.e. do not carry what you concluded in one part into the next – except for part (e) where you are explicitly asked to continue with the set-up in part (d).
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Suppose a price-taking firm uses a single input – labor – to produce an output x. The production technology has diminishing marginal product of labor throughout.
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If firms differ in terms of their technologies, a drop in demand will cause a long run decrease in output price.
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Suppose there are no recurring fixed costs and the daily production process for all identical firms in a perfectly competitive industry has decreasing returns to scale throughout. Then each firm will only produce a single good each day when the industry is in long run equilibrium.
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A decrease in the rental rate of capital can lead to a long run increase or decrease in the number of firms in the industry.
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