14/141Q4Whyshouldpolicymakersthinkaboutincentives?Policymakersneedtothinkaboutincentivessotheycanunderstandhowpeoplewillrespondtothepoliciestheyputinplace.Thetext'sexampleofseatbeltsshowsthatpolicyactionscanhavequiteunintendedconsequences.Ifincentivesmatteralot,theymayleadtoaverydifferenttypeofpolicy;forexample,someeconomistshavesuggestedputtingknivesinsteeringcolumnssothatpeoplewilldrivemuchmorecarefully!Whilethissuggestionissilly,ithighlightstheimportanceofincentives.Q6whatdoestheinvisiblehandofthemarketplacedo?The"invisiblehand"ofthemarketplacerepresentstheideathateventhoughindividualsandfirmsareallactingintheirownself-interest,pricesandthemarketplaceguidethemtodowhatisgoodforsocietyasawhole.2Q1Howiseconomicslikeascience?Economicsislikeasciencebecauseeconomistsusethescientificmethod.Theydevisetheories,collectdata,andthenanalyzethesedatainanattempttoverifyorrefutetheirtheoriesabouthowtheworldworks.Economistsusetheoryandobservationlikeotherscientists,buttheyarelimitedintheirabilitytoruncontrolledexperiments.Instead,theymustrelyonnaturalexperiments.Q5Useaproductionpossibilitiesfrontiertodescribetheideaof“efficiency”?Theideaofefficiencyisthatanoutcomeisefficientiftheeconomyisgettingallitcanfromthescarceresourcesithasavailable.Intermsoftheproductionpossibilitiesfrontier,anefficientpointisapointonthefrontier,suchaspointAinFigure4.Apointinsidethefrontier,suchaspointB,isinefficientsincemoreofonegoodcouldbeproducedwithoutreducingtheproductionofanothergood.Q7Whatisthedifferencebetweenapositiveandanormativestatement?Giveanexampleofthat.Positivestatementsaredescriptiveandmakeaclaimabouthowtheworldis,whilenormativestatementsareprescriptiveandmakeaclaimabouthowtheworldoughttobe.Hereisanexample.Positive:Arapidgrowthrateofmoneyisthecauseofinflation.Normative:Thegovernmentshouldkeepthegrowthrateofmoneylow.3Q1Explainhowabsoluteadvantageandcomparativeadvantagediffer.Absoluteadvantagereflectsacomparisonoftheproductivityofoneperson,firm,ornationtothatofanother,whilecomparativeadvantageisbasedontherelativeopportunitycostsofthepersons,firms,ornations.Whileaperson,firm,ornationmayhaveanabsoluteadvantageinproducingeverygood,theycan'thaveacomparativeadvantageineverygood.Q4WillanationtendtoexportorimportgoodstoQuestion2.Anationwillexportgoodsforwhichithasacomparativeadvantagebecauseithasasmalleropportunitycostofproducingthosegoods.Asaresult,citizensofallnationsareabletoconsumequantitiesofgoodsthatareoutsidetheirproductionpossibilitiesfrontiers.4Q5Propeye’sincomedeclines,andasaresult,hebuysmorespinach.Isspinachaninferiororanormalgoods?WhathappenstoPopeye’sdemandcurveforspinach?SincePopeyebuysmorespinachwhenhisincomefalls,spinachisaninferiorgoodforhim.Sincehebuysmorespinach,butthepriceofspinachisunchanged,hisdemandcurveforspinachshiftsoutasaresultofthedecreaseinhisincome.Q8Doseachangeinproducers’technologyleadtoamovementalongthesupplycurve?Doesachangeinpriceleadtoamovementalongthesupplycurveorashiftinthesupplycurve?Achangeinproducers'technologyleadstoashiftinthesupplycurve.Achangeinpriceleadstoamovementalongthesupplycurve.Q9Definetheequilibriumofamarket.Describetheforcesthatmoveamarkettowardsitsequilibrium.Theequilibriumofamarketisthepointatwhichthequantitydemandedisequaltoquantitysupplied.Ifthepriceisabovetheequilibriumprice,sellerswanttosellmorethanbuyerswanttobuy,sothereisasurplus.Sellerstrytoincreasetheirsalesbycuttingprices.Thatcontinuesuntiltheyreachtheequilibriumprice.Ifthepriceisbelowtheequilibriumprice,buyerswanttobuymorethansellerswanttosell,sothereisashortage.Sellerscanraisetheirpricewithoutlosingcustomers.Thatcontinuesuntiltheyreachtheequilibriumprice.Q11Describetheroleofpricesinmarketeconomies.Pricesplayavitalroleinmarketeconomiesbecausetheybringmarketsintoequilibrium.Ifthepriceisdifferentfromitsequilibriumlevel,quantitysuppliedandquantitydemandedarenotequal.Theresultingsurplusorshortageleadssupplierstoadjustthepriceuntilequilibriumisrestored.Pricesthusserveassignalsthatguideeconomicdecisionsandallocatescarceresources.5Q2Listandexplainthefourdeterminantsofthepriceelasticityofdemanddiscussedinthechapter.Thedeterminantsofthepriceelasticityofdemandincludehowavailableclosesubstitutesare,whetherthegoodisanecessityoraluxury,howbroadlydefinedthemarketis,andthetimehorizon.Luxurygoodshavegreaterpriceelastictiesthannecessities,goodswithclosesubstituteshavegreaterelasticties,goodsinmorenarrowlydefinedmarketshavegreaterelasticties,andtheelasticityofdemandishigherthelongerthetimehorizon.Q4Onasupply-and-demanddiagram,showequilibriumprice,equilibriumquantity,andthetotalrevenuereceivedbyproducers.Figure1presentsasupply-and-demanddiagram,showingequilibriumprice,equilibriumquantity,andthetotalrevenuereceivedbyproducers.Totalrevenueequalstheequilibriumpricetimestheequilibriumquantity,whichistheareaoftherectangleshowninthefigure.Figure16Q2Whichcausesashortageofagood—apriceceilingorapricefloor?Whichcausesasurplus?Ashortageofagoodariseswhenthereisabindingpriceceiling.Asurplusofagoodariseswhenthereisabindingpricefloor.Q6Howdoesataxonagoodaffectthepricepaidbybuyers,andthequantitysold?Ataxonagoodraisesthepricebuyerspay,lowersthepricesellersreceive,andreducesthequantitysold.Q7Whatdetermineshowtheburdenofataxisdividedbetweenbuyersandsellers?Why?Theburdenofataxisdividedbetweenbuyersandsellersdependingontheelasticityofdemandandsupply.Elasticityrepresentsthewillingnessofbuyersorsellerstoleavethemarket,whichinturnsdependsontheiralternatives.Whenagoodistaxed,thesideofthemarketwithfewergoodalternativescannoteasilyleavethemarketandthusbearsmoreoftheburdenofthetax.7Q1Explainhowbuyer’swillingnesstopay,consumer’surplus,andthedemandcurvearerelated.Buyers'willingnesstopay,consumersurplus,andthedemandcurveareallcloselyrelated.Theheightofthedemandcurverepresentsthewillingnesstopayofthebuyers.Consumersurplusistheareabelowthedemandcurveandabovetheprice,whichequalseachbuyer'swillingnesstopaylessthepriceofthegood.Q2Explainhowseller’scosts,producer’ssurplus,andthesupplycurvearerelated.Sellers'costs,producersurplus,andthesupplycurveareallcloselyrelated.Theheightofthesupplycurverepresentsthecostsofthesellers.Producersurplusistheareabelowthepriceandabovethesupplycurve,whichequalsthepriceminuseachsellers'costs.Figure413Q2Giveanexampleofanopportunitycostthataccountantmightnotcountasacost.Whywouldtheaccountantignorethecost?Anaccountantwouldnotcounttheowner’sopportunitycostofalternativeemploymentasanaccountingcost.AnexampleisgiveninthetextinwhichHelenrunsacookiebusiness,butshecouldinsteadworkasacomputerprogrammer.Becauseshe'sworkinginhercookiefactory,shegivesuptheopportunitytoearn$100perhourasacomputerprogrammer.Theaccountantignoresthisopportunitycostbecausenomoneyflowoccurs.ButthecostisrelevanttoHelen'sdecisiontorunthecookiefactory.Q3Whatismarginalproduct,andwhatdoesitmeansifitisdiminishing?Marginalproductistheincreaseinoutputthatarisesfromanadditionalunitofinput.Diminishingmarginalproductmeansthatthemarginalproductofaninputdeclinesasthequantityoftheinputincreases.Q8Defindeconomiesofscaleandexplainwhytheymightarise.Definediseconomiesofscaleandexplainwhythenmightarise.Economiesofscaleexistwhenlong-runaveragetotalcostfallsasthequantityofoutputincreases,whichoccursbecauseofspecializationamongworkers.Diseconomiesofscaleexistwhenlong-runaveragetotalcostrisesasthequantityofoutputincreases,whichoccursbecauseofcoordinationproblemsinherentinalargeorganization.14Q2Drawthecostcurvesforatypicalfirm.Foragivenprice,explainhowthefirmchoosesthelevelofoutputthatmaximizesprofit.Figure2showsthecostcurvesforatypicalfirm.Foragivenprice(suchasP*),thelevelofoutputthatmaximizesprofitistheoutputwheremarginalcostequalsprice(Q*),aslongaspriceisgreaterthanaveragevariablecostatthatpoint(intheshortrun),orgreaterthanaveragetotalcost(inthelongrun).Figure2Q6Doesafirm’spriceequalmarginalcostintheshortrun,inthelongrun,orboth?Explain.Thefirm'spriceequalstheminimumofaveragetotalcostonlyinthelongrun.Intheshortrun,pricemaybegreaterthanaveragetotalcost,inwhichcasethefirmismakingprofits,orpricemaybelessthanaveragetotalcost,inwhichcasethefirmismakinglosses.Butthesituationisdifferentinthelongrun.Iffirmsaremakingprofits,otherfirmswillentertheindustry,whichwilllowerthepriceofthegood.Iffirmsaremakinglosses,theywillexittheindustry,whichwillraisethepriceofthegood.Entryorexitcontinuesuntilfirmsaremakingneitherprofitsnorlosses.Atthatpoint,priceequalsaveragetotalcost.15Q3Whyismonopolist’smarginalrevenuelessthanthepriceofitsgoods?Canmarginalrevenuebenegative?Explain.Amonopolist'smarginalrevenueislessthanthepriceofitsproductbecause:(1)itsdemandcurveisthemarketdemandcurve,so(2)toincreasetheamountsold,themonopolistmustlowerthepriceofitsgoodforeveryunititsells.(3)Thiscutinpricesreducesrevenueontheunitsitwasalreadyselling.Amonopolist'smarginalrevenuecanbenegativebecausetogetpurchaserstobuyanadditionalunitofthegood,thefirmmustreduceitspriceonallunitsofthegood.Thefactthatitsellsagreaterquantityincreasesrevenue,butthedeclineinpricedecreasesrevenue.Theoveralleffectdependsontheelasticityofthedemandcurve.Ifthedemandcurveisinelastic,marginalrevenuewillbenegative.Q4Drawthedemand,marginal-revenue,andmarginal-costcurveforamonopolist.Showtheprofit-maximizinglevelofoutput.Showtheprofit-maximizingprice.Figure1showsthedemand,marginal-revenue,andmarginal-costcurvesforamonopolist.Theintersectionofthemarginal-revenueandmarginal-costcurvesdeterminestheprofit-maximizinglevelofoutput,Qm.Thedemandcurvethenshowstheprofit-maximizingprice,Pm.Figure116Q1Ifagroupofsellerscouldformacartel,whatquantityandpricewouldtheytrytoset?Ifagroupofsellerscouldformacartel,theywouldtrytosetquantityandpricelikeamonopolist.Theywouldsetquantityatthepointwheremarginalrevenueequalsmarginalcost,andsetpriceatthecorrespondingpointonthedemandcurve.Q5Whatistheprisoners’dilemmaandwhatdoesithavetodowitholigopoly?Theprisoners'dilemmaisagamebetweentwopeopleorfirmsthatillustrateswhyitisdifficultforopponentstocooperateevenwhencooperationwouldmakethemallbetteroff.Eachpersonorfirmhasagreatincentivetocheatonanycooperativeagreementtomakehimselforitselfbetteroff.17Q2Drawadiagramofthelong-runequilibriuminamonopolisticallycompetitivemarket.Howispricerelatedtoaveragetotalcost?Howispricerelatedtomarginalcost?InFigure2,afirmhasdemandcurveD1andmarginal-revenuecurveMR1.ThefirmismakingprofitsbecauseatquantityQ1,price(P1)isaboveaveragetotalcost(ATC).Thoseprofitsinduceotherfirmstoentertheindustry,causingthedemandcurvetoshifttoD2andthemarginal-revenuecurvetoshifttoMR2.TheresultisadeclineinquantitytoQ2,atwhichpointtheprice(P2)equalsaveragetotalcost(ATC),soprofitsarenowzero.Figure223Q1Explainwhyaneconomy’sincomemustequalitsexpenditure.Aneconomy'sincomemustequalitsexpenditure,sinceeverytransactionhasabuyerandaseller.Thus,expenditurebybuyersmustequalincomebysellers.24Q2Describethethreeproblemsthatmaketheconsumerpriceindexanimperfectmeasureofthecostofliving.Thethreeproblemsintheconsumerpriceindexasameasureofthecostoflivingare:(1)substitutionbias,whicharisesbecausepeoplesubstitutetowardgoodsthathavebecomerelativelylessexpensive;(2)theintroductionofnewgoods,whicharenotreflectedquicklyintheCPI;and(3)unmeasuredqualitychange.25Q2Listanddescribefourdeterminantsofproductivity.Thefourdeterminantsofproductivityare:(1)physicalcapital,whichisthestockofequipmentandstructuresthatareusedtoproducegoodsandservices;(2)humancapital,whichconsistsoftheknowledgeandskillsthatworkersacquirethrougheducation,training,andexperience;(3)naturalresources,whichareinputsintoproductionthatareprovidedbynature;and(4)technologicalknowledge,whichissociety’sunderstandingofthebestwaystoproducegoodsandservices.Questionsarechosenfromproblemsandapplications.Chapter1:Q9Byspecializingineachtask,youandyourroommatecanfinishthechoresmorequickly.Ifyoudividedeachtaskequally,itwouldtakeyoumoretimetocookthanitwouldtakeyourroommate,anditwouldtakehimmoretimetocleanthanitwouldtakeyou.Byspecializing,youreducethetotaltimespentonchores.Similarly,countriescanspecializeandtrade,makingbothbetteroff.Forexample,supposeittakesSpanishworkerslesstimetomakeclothesthanFrenchworkers,andFrenchworkerscanmakewinemoreefficientlythanSpanishworkers.ThenSpainandFrancecanbothbenefitifSpanishworkersproducealltheclothesandFrenchworkersproduceallthewine,andtheyexchangesomewineforsomeclothes.Chapter2:Q2a. Figure6showsaproductionpossibilitiesfrontierbetweengunsandbutter.Itisbowedoutbecausewhenmostoftheeconomy’sresourcesarebeingusedtoproducebutter,thefrontierissteepandwhenmostoftheeconomy’sresourcesarebeingusedtoproduceguns,thefrontierisveryflat.Whentheeconomyisproducingalotofguns,workersandmachinesbestsuitedtomakingbutterarebeingusedtomakeguns,soeachunitofgunsgivenupyieldsalargeincreaseintheproductionofbutter.Thus,theproductionpossibilitiesfrontierisflat.Whentheeconomyisproducingalotofbutter,workersandmachinesbestsuitedtomakinggunsarebeingusedtomakebutter,soeachunitofgunsgivenupyieldsasmallincreaseintheproductionofbutter.Thus,theproductionpossibilitiesfrontierissteep. b. PointAisimpossiblefortheeconomytoachieve;itisoutsidetheproductionpossibilitiesfrontier.PointBisfeasiblebutinefficientbecauseit’sinsidetheproductionpossibilitiesfrontier.Figure6 c. TheHawksmightchooseapointlikeH,withmanygunsandnotmuchbutter.TheDovesmightchooseapointlikeD,withalotofbutterandfewguns. d. IfbothHawksandDovesreducedtheirdesiredquantityofgunsbythesameamount,theHawkswouldgetabiggerpeacedividendbecausetheproductionpossibilitiesfrontierismuchsteeperatpointHthanatpointD.Asaresult,thereductionofagivennumberofguns,startingatpointH,leadstoamuchlargerincreaseinthequantityofbutterproducedthanwhenstartingatpointD.Chapter3:Q4a. SinceaCanadianworkercanmakeeithertwocarsayearor30bushelsofwheat,theopportunitycostofacaris15bushelsofwheat.Similarly,theopportunitycostofabushelofwheatis1/15ofacar.Theopportunitycostsarethereciprocalsofeachother.b. SeeFigure4.Ifall10millionworkersproducetwocarseach,theyproduceatotalof20millioncars,whichistheverticalinterceptoftheproductionpossibilitiesfrontier.Ifall10millionworkersproduce30bushelsofwheateach,theyproduceatotalof300millionbushels,whichisthehorizontalinterceptoftheproductionpossibilitiesfrontier.Sincethetradeoffbetweencarsandwheatisalwaysthesame,theproductionpossibilitiesfrontierisastraightline.IfCanadachoosestoconsume10millioncars,itwillneed5millionworkersdevotedtocarproduction.Thatleaves5millionworkerstoproducewheat,whowillproduceatotalof150millionbushels(5millionworkerstimes30bushelsperworker).ThisisshownaspointAonFigure4.c. IftheUnitedStatesbuys10millioncarsfromCanadaandCanadacontinuestoconsume10millioncars,thenCanadawillneedtoproduceatotalof20millioncars.SoCanadawillbeproducingattheverticalinterceptoftheproductionpossibilitiesfrontier.ButifCanadagets20bushelsofwheatpercar,itwillbeabletoconsume200millionbushelsofwheat,alongwiththe10millioncars.ThisisshownaspointBinthefigure.Canadashouldacceptthedealbecauseitgetsthesamenumberofcarsand50millionmorebushesofwheat.Figure4Chapter4:Q1a. Coldweatherdamagestheorangecrop,reducingthesupplyoforanges.ThiscanbeseeninFigure6asashifttotheleftinthesupplycurvefororanges.Thenewequilibriumpriceishigherthantheoldequilibriumprice.b. PeopleoftentraveltotheCaribbeanfromNewEnglandtoescapecoldweather,sodemandforCaribbeanhotelroomsishighinthewinter.Inthesummer,fewerpeopletraveltotheCaribbean,sincenorthernclimesaremorepleasant.Theresult,asshowninFigure7,isashifttotheleftinthedemandcurve.TheequilibriumpriceofCaribbeanhotelroomsisthuslowerinthesummerthaninthewinter,asthefigureshows.Figure6aFigure7bc. WhenawarbreaksoutintheMiddleEast,manymarketsareaffected.Sincemuchoilproductiontakesplacethere,thewardisruptsoilsupplies,shiftingthesupplycurveforgasolinetotheleft,asshowninFigure8.Theresultisariseintheequilibriumpriceofgasoline.Withahigherpriceforgasoline,thecostofoperatingagas-guzzlingautomobile,likeaCadillac,willincrease.Asaresult,thedemandforusedCadillacswilldecline,aspeopleinthemarketforcarswillnotfindCadillacsasattractive.Inaddition,somepeoplewhoalreadyownCadillacswilltrytosellthem.TheresultisthatthedemandcurveforusedCadillacsshiftstotheleft,whilethesupplycurveshiftstotheright,asshowninFigure9.TheresultisadeclineintheequilibriumpriceofusedCadillacs.Figure8c Figure9cChapter5:Q2a. Forbusinesstravelers,thepriceelasticityofdemandwhenthepriceofticketsrisesfrom$200to$250is[(2,000-1,900)/1,950]/[(250-200)/225]=0.05/0.22=0.23.Forvacationers,thepriceelasticityofdemandwhenthepriceofticketsrisesfrom$200to$250is[(800-600)/700]/[(250-200)/225]=0.29/0.22=1.32.b. Thepriceelasticityofdemandforvacationersishigherthantheelasticityforbusinesstravelersbecausevacationerscanchoosemoreeasilyadifferentmodeoftransportation(likedrivingortakingthetrain).Businesstravelersarelesslikelytodososincetimeismoreimportanttothemandtheirschedulesarelessadaptable.Chapter6:Q2a. TheimpositionofabindingpricefloorinthecheesemarketisshowninFigure3.Intheabsenceofthepricefloor,thepricewouldbeP1andthequantitywouldbeQ1.WiththefloorsetatPf,whichisgreaterthanP1,thequantitydemandedisQ2,whilequantitysuppliedisQ3,sothereisasurplusofcheeseintheamountQ3–Q2.b. Thefarmers’complaintthattheirtotalrevenuehasdeclinediscorrectifdemandiselastic.Withelasticdemand,thepercentagedeclineinquantitywouldexceedthepercentageriseinprice,sototalrevenuewoulddecline.c. Ifthegovernmentpurchasesallthesurpluscheeseatthepricefloor,producersbenefitandtaxpayerslose.ProducerswouldproducequantityQ3ofcheese,andtheirtotalrevenuewouldincreasesubstantially.ButconsumerswouldbuyonlyquantityQ2ofcheese,sotheyareinthesamepositionasbefore.Taxpayerslosebecausetheywouldbefinancingthepurchaseofthesurpluscheesethroughhighertaxes.Figure3aChapter7:Q8a. Theeffectoffallingproductioncostsinthemarketforcomputersresultsinashifttotherightinthesupplycurve,asshowninFigure14.Asaresult,theequilibriumpriceofcomputersdeclinesandtheequilibriumquantityincreases.ThedeclineinthepriceofcomputersincreasesconsumersurplusfromareaAtoA+B+C+D,anincreaseintheamountB+C+D. Priortotheshiftinsupply,producersurpluswasareasB+E(theareaabovethesupplycurveandbelowtheprice).Aftertheshiftinsupply,producersurplusisareasE+F+G.SoproducersurpluschangesbytheamountF+G–B,whichmaybepositiveornegative.Theincreaseinquantityincreasesproducersurplus,whilethedeclineinthepricereducesproducersurplus.SinceconsumersurplusrisesbyB+C+DandproducersurplusrisesbyF+G–B,totalsurplusrisesbyC+D+F+G.Figure14AFigure15b b. Sinceaddingmachinesaresubstitutesforcomputers,thedeclineinthepriceofcomputersmeansthatpeoplesubstitutecomputersforaddingmachines,shiftingthedemandforaddingmachinestotheleft,asshowninFigure15.Theresultisadeclineinboththeequilibriumpriceandequilibriumquantityofaddingmachines.Consumersurplusintheadding-machinemarketchangesfromareaA+BtoA+C,anetchangeofC–B.ProducersurpluschangesfromareaC+D+EtoareaE,anetlossofC+D.Addingmachineproducersaresadabouttechnologicaladvanceincomputersbecausetheirproducersurplusdeclines. c. Sincesoftwareandcomputersarecomplements,thedeclineinthepriceandincreaseinthequantityofcomputersmeansthatthedemandforsoftwareincreases,shiftingthedemandforsoftwaretotheright,asshowninFigure16.Theresultisanincreaseinboththepriceandquantityofsoftware.ConsumersurplusinthesoftwaremarketchangesfromB+CtoA+B,anetchangeofA–C.ProducersurpluschangesfromEtoC+D+E,anincreaseofC+D,sosoftwareproducersshouldbehappyaboutthetechnologicalprogressincomputers. d. Yes,thisanalysishelpsexplainwhyBillGatesisonetheworld’srichestmen,sincehiscompanyproducesalotofsoftwarethatisacomplementwithcomputersandtherehasbeentremendoustechnologicaladvanceincomputers.Figure16Chapter13:Q4a. Thefollowingtableshowsthemarginalproductofeachhourspentfishing:HoursFishFixedCostVariableCostTotalCostMarginalProduct00$10$0$1011010515102181010208324101525642810203045301025252b. Figure7graphsthefisherman'sproductionfunction.Theproductionfunctionbecomesflatterasthenumberofhoursspentfishingincreases,illustratingdiminishingmarginalproduct.Figure7bFigure8cc. Thetableshowsthefixedcost,variablecost,andtotalcostoffishing.Figure8showsthefisherman'stotal-costcurve.Itslopesupbecausecatchingadditionalfishtakesadditionaltime.Thecurveisconvexbecausetherearediminishingreturnstofishingtimeeachadditionalhourspentfishingyieldsfeweradditionalfish.Chapter14:Q9a. Figure9illustratesthesituationintheU.S.textileindustry.Withnointernationaltrade,themarketisinlong-runequilibrium.SupplyintersectsdemandatquantityQ1andprice$30,withatypicalfirmproducingoutputq1.Figure9b. Theeffectofimportsat$25isthatthemarketsupplycurvefollowstheoldsupplycurveuptoapriceof$25,thenbecomeshorizontalatthatprice.Asaresult,demandexceedsdomesticsupply,sothecountryimportstextilesfromothercountries.Thetypicaldomesticfirmnowreducesitsoutputfromq1toq2,incurringlosses,sincethelargefixedcostsimplythataveragetotalcostwillbemuchhigherthantheprice.c. Inthelongrun,domesticfirmswillbeunabletocompetewithforeignfirmsbecausetheircostsaretoohigh.Allthedomesticfirmswillexittheindustryandothercountrieswillsupplyenoughtosatisfytheentiredomesticdemand.Chapter15:Q4a. Figure5illustratesthemarketforgrocerieswhentherearemanycompetingsupermarketswithconstantmarginalcost.OutputisQC,priceisPC,consumersurplusisareaA,