Question

In: Economics

Independent trucking is an industry that can be considered perfectly competitive. Draw a graph showing market...

Independent trucking is an industry that can be considered perfectly competitive. Draw a graph showing market supply, market demand, and equilibrium price and quantity. Draw a corresponding graph for the individual firm/trucker using the market equilibrium price and marginal cost curve. If you line up the two graphs horizontally, the equilibrium price should be the same on both graphs.

Now suppose that GDP increases as U.S. manufacturers produce more output. What impact will this have on the independent trucking industry in the short run, in terms of the market price, output of an individual firm, and market equilibrium quantity? Explain your reasoning. What impact will the increase in manufacturing output have in the long run? Show graphically and explain your reasoning.

Solutions

Expert Solution

In following graph, left panel shows the market equilibrium where demand and supply curves (D0 and S0) intersect at point A with market price P0 and market quantity Q0.

In right panel, firms consider P0 as their relevant price and produces at point B where P0 intersects MC0 with firm output q0. In long run equilibrium, economic profit is zero, so price equals ATC, so P0, ATC0 and MC0 intersect at common equilibrium point A.

Increase in GDP caused by higher manufacturing output will increase the demand for independent trucking. As demand increases, D0 shifts rightward to D1, intersecting S0 at point C with higher market price P1 and higher market output Q1.

For Firms, P1 is their relevant new price. New short run equilibrium is at point E, where P1 intersects MC0 with higher firm output q1. Firms earn economic profit equal to area P1EFG.

In long run, economic profit attracts new entry, increasing market supply, shifting S0 rightward to S1. New long run equilibrium is at point H where D1 and S1 intersect at original price P0 but higher market quantity Q2. Thus, firms return to initial long run equilibrium point B.


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