Question

2. Assume that the market for beer in San Deigo by college students is perfectly competitive. Use a graph of the market and a representative firm in the market to illustrate the initial market conditions (long run conditions) and the changes, in both the short and long run, to a reduction in the number of colleges in San Diego

3. In relation to question 2, assume that the market for higher education in San Deigo is best characterized as monopolistically competitive. Assuming that this market was in long run equilibrium prior to the college(s) leaving the market, graphically show the impact of the reduction in colleges on this market in both the long and short run.

Answer 1

2).

Consider the given problem here “D1” and “S1” are the market demand and supply curves and “E1” is the equilibrium where “P1 = min(ATC)”. Now, as the numbers of colleges decreases, => demand for beer also decreases to “D2”, => the new price is given by “P2” the intersection of “D2” and “S1”. Now, as the price decreases to “P2”, => all the firm decrease their production from “q1” to “q2” in left fig.

Now, we can see that “P2 < min (ATC)”, => all the existing firms are making losses, => few firms starts living the industry, => market supply starts decreasing, => the price starts increasing. Now, the process of adjustment will continue until a new LR equilibrium will established. So, the new LR equilibrium is given by “E2” the intersection of “D2” and “S2”. So, as the numbers of colleges decreases implied the LR price will remain same but the market quantity and the numbers of firms will decreases.