Lightbolt Inc. makes bolts and sells in a perfectly competitive market. The manager of the firm...

Lightbolt Inc. makes bolts and sells in a perfectly competitive market. The manager of the firm reads business publications regularly to keep up with market changes. Recently, two events came to her attention: (a) the overall market supply of bolts will decrease by 4% due to exit by competitors, (b) the overall market demand for bolts will increase by 4% due to a manufacturing boom. How will this affect the firm’s production and profit? Show graphically (assuming P = MC = ATC when manager was informed of the events).

Expert Solution

Two events are occurring at the same time one that is decreasing the market supply and shifting the market supply curve to the left and second that increases the market demand and shifting the market demand curve to the right. Size of the shift is same which indicates that there will be no change in the market quantity but there will be an increase in the market price. This is going to increase the production for the firm because when price is increased profit maximizing quantity at P = MC also increases. Because there is no change in the cost of production it is likely that the profit generated by the firm will also increase in the short run.

Rahul Sunny answered 2 years ago

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