The graph below helps in answering this question. Since the new long run supply curve S2 is shifted back from the original curve, there are fewer firms. However, the price and output of the individual firms who remained in the industry have returned to their original levels, as we would expect with a change brought about by a demand shift. 9. Comparing the new long run equilibrium in the wool sock industry with the original one, you expect to find that:

1. There will be fewer firms, with each firm charging the same price and producing the same output as in the original equilibrium.
2. There will be fewer firms, with each firm charging a lower price and producing less output than in the original equilibrium. The only way for the new long run equilibrium price to be lower than before would be if, for some reason, costs had fallen. There is no reason to suppose that this would have occurred.
3. There will be more firms, with each firm charging a lower price and producing less output than in the original equilibrium. More firms would require entry which could only have resulted from profits. Lower prices would require a reduction in production costs.
4. There will be more firms, with each firm charging the same price and producing the same output as in the original equilibrium. This would be correct if demand had increased rather than decreased.
5. There will be fewer firms, with each firm charging a higher price and producing less output than in the original equilibrium. Fewer firms is okay, but higher prices and lower output requires an increase in production costs.

Next Question Copyright © 1995-2004 OnLineTexts.com, Inc. - All Rights Reserved