Suppose constant returns to scale in the production of a particular good, and free entry into...

Suppose constant returns to scale in the production of a particular good, and free entry into the market for that good. Where would we expect the price of that good to end up?

What is an isoquant?

What is a production function?

Say there are DRS. If market supply falls ceteris paribus, what would happen to price?

Say there are DRS. If market demand falls ceteris paribus, what would happen to price?

Solutions

Expert Solution

1. With constant return to scale, the output produced by the industry will remain same and therefore the price would be equal to the marginal cost. It is because if price is higher more firm will try to enter and with constant returns, the supply in the market rises and will cause price to fall and vice versa.

2. Isoquant is tool used to measure those combinations of inputs which yield same level of output to the firm.

3. The functional relationship between the inputs to be used in the manufacturing process and the output obtained from the manufacturing process is termed as production function.

4. Say there are DRS. If market supply falls ceteris paribus, the price will increase because less firm are now meeting the demand of the market.

5. Say there are DRS. If market demand falls ceteris paribus, price will fall because the less number of buyers are willing to buy the offered product and therefore, the demand curve shifts downward.

Rahul Sunny answered 1 week ago

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