1 In a perfectly competitive market in longrun

1. In a perfectly competitive market in long-run equilibrium, what would be the immediate results of imposing and enforcing a price ceiling below the equilibrium price of the product? What would be the long-run effect of continuing to enforce the ceiling price, assuming black markets do not develop? Be sure to explain why the predicted effects will occur.

1. In a perfectly competitive market in long-run equilibrium, MC LRATC P a MR=D=AR = P S P D 0 q TR = 0 paq TC = 0 paq Q

1. In a perfectly competitive market in long-run equilibrium, what would be the immediate results of imposing and enforcing a price ceiling below the equilibrium price of the product? MC S LRATC MR=D=AR = P Pc D q Qd Q> Qs Imposing and enforcing a price ceiling lowers the price, this causes quantity demanded to decrease and quantity supplied to increase. When Qd is greater than Qs, this causes a shortage in the market place.

MC LRATC MR=D=AR = P P P 1 S P Pc MR 1=D 1=AR 1=P 1 D q 1 q Qd Q Qs Since all the firms in a perfectly competitive market are price takers, they will take the ceiling price. Each firm will lower its price. Each firm’s output decreases to where MR 1 = MC.

What would be the long-run effect of continuing to enforce the ceiling price, assuming black S 1 markets do not develop? S LRATC d P P 1 c b MR=D=AR = P P Pc MR 1=D 1=AR 1=P 1 D 0 Qd Q Qs q 1 q Since firms would be earning below economic profits, TR = 0 P 1 bq 1, TC = 0 dcq 1 Economics profits are less than 0, P 1 dcb Firms would exit the market.

Be sure to explain why the predicted effects will occur. S 1 d P P 1 0 c b P 1 MR=D=AR = P P LRATC S Pc MR 1=D 1=AR 1=P 1 D q 1 q Qd Q Qs As firms exit the market the firms in the market would like to charge the market price P 1, but since they are forced to charge the Pc, there will be no firms willing to supply at the ceiling price.