1. (5 points) A constant cost industry is one in which the LRMC for the industry is constant. An increasing cost industry is one in which the LRMC for the industry is increasing. Which is more likely to be a constant cost industry: bagel restaurants or cranberry production? Explain. What does this imply about the slopes of the long-run supply curves in these industries?
In this article, the bagel industry closely resembles a constant cost industry. A constant cost industry is a perfectly competitive industry that gives a horizontal long run industry supply curve. The slope for this supply curve is infinity. The expansion of the industry causes no change in the production cost. The entry of new firms, driven by an increase in demand…show more content… The enticing profit margin increased the number of bagel outlets from 1,000 in 1995 to 6,000 in 1997. As a result the supply curve shifts (S1) to the right lowering price (P1 ). George’s competitors were willing to sell at a price below the equilibrium price. This constant recalibration of the market as it reacts to market forces removes economic profit in the long run even for firms that still produce the product if the price were lower.
3. (15 points) Do you think it is a good idea for George to purchase the cranberry land and enter this business? If you answer “no,” explain why you think it is a bad idea. If you answer “yes,” explain how George is likely to profit from this venture. (This is the most important question. Make sure you think about it carefully and use the concepts from class.)
In this case, George should buy the cranberry bog and enter the industry because he is likely to receive economic profits in the short run. The cranberry business is somewhat unique because it is not a perfectly competitive market. One reason for this is the high barriers of entry into the market. The amount of land suitable to grow cranberries is very scarce, and the cost of converting the land into cranberry bogs is very high. Most importantly, this conversion takes anywhere from 3-5 years. Another barrier to entry is the cost of overcoming environmental concerns of polluted water run-off produced from cranberry bogs.
