1. J&P Company operates in a perfectly

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1. J&P Company operates in a perfectly competitive market for smoke alarms. J&P is currently earning short-run positive economic profits. (a) Using correctly labeled side-by-side graphs for the smoke alarm market and J&P Company, indicate each of the following for both the market and the J&P Company. (i) Price (ii) Output

Perfectly competitive with economic profits (a) Side-by-side graph (market and firm) (i) Price (ii) Output MC S e P MR=D=AR=P P D Q q

(b) In the graph in part (a) for J&P, indicate the area of economic profits that J&P Company is earning in the short run. MC S e P MR=D=AR=P P g f D Q q TR = 0Peq TC = 0gfq Economic Profit = gpef

(c) Using a new set of correctly labeled side-by- side graphs for the smoke alarm market and J&P Company, show what will happen in the long run to each of the following. (i) Long-run equilibrium price and quantity in the market (ii) Long-run equilibrium price and quantity for J&P Company

(c) side-by-side graphs in the long run (i) Long-run equilibrium price and quantity in the market MC S e P S1 MR=D=AR=P P g P1 f D Q Q1 q In the long run, firms will enter the market causing the supply curve to shift to the right. Market price will decrease. Market Q will increase.

(c) side-by-side graphs in the long run (ii) Long-run equilibrium price and quantity for J&P Company MC S e P S1 MR=D=AR=P P g P1 MR1=D1=AR1=P1 P1 f D Q Q1 q1 q Since J&P Company is a price taker it will take the market price. J&P Co. price goes down. J&P now produces where the new MR1 = MC. J&P Co. quantity decreases.

(d) Assume that purchase of smoke alarms create positive externalities. Draw a correctly labeled graph of the smoke alarm market. (i) Label the market equilibrium quantity as Qm (ii) Label the socially optimum equilibrium quantity as Qs

(d) Assume that purchase of smoke alarms create positive externalities. Draw a correctly labeled graph of the smoke alarm market. (i) Label the market equilibrium quantity as Qm (ii) Label the socially optimum equilibrium quantity as Qs S Price Pm D Qm Quantity

(d) Assume that purchase of smoke alarms create positive externalities. Draw a correctly labeled graph of the smoke alarm market. (i) Label the market equilibrium quantity as Qm (ii) Label the socially optimum equilibrium quantity as Qs S Price Ps Pm D2 = MSB D Qm Qs Quantity

(e) Identify one government policy that could be implemented to encourage the industry to produce the socially optimum level of smoke alarms. Subsidize sellers or buyers. Mandatory smoke alarm system. Tax relief.