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Chapter 8: Q.8 (page 211)

A market in perfect competition is in long-run equilibrium. What happens to the market if labor unions are able to increase wages for workers?

Short Answer

Expert verified

Supply in the market falls and hence price rises.

Step by step solution

01

Introduction

The perfect competition takes place if all firms sell similar items, market share has no effect on the price, companies can enter and exit without hindrance, buyers have perfect or complete information, and companies cannot determine prices.

02

Explanation

As the wages rise, cost of productions rises too. When cost of production goes up at the prevailing wages, some firms will face losses. This is because overall, a firm in perfect competitive market can't earn economic profit. They can just cover up the costs incurred.

So, some firms will shut down. This leads to a upward shift in the prices of the commodities due to reduced supply. Such adjustments will continue in the market till the firms earn 0economic profits.

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Most popular questions from this chapter

What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges?

Why will losses for firms in a perfectly competitive industry tend to vanish in the long run?

What are the four basic assumptions of perfect competition? Explain in words what they imply for a perfectly competitive firm.

1. A computer company produces affordable, easy-to-use home computer systems and has fixed costs of \(250. The marginal cost of producing computers is \)700 for the first computer, \(250 for the second, \)300 for the third, \(350 for the fourth, \)400 for the fifth, \(450 for the sixth, and \)500 for the seventh.

a. Create a table that shows the company’s output, total cost, marginal cost, average cost, variable cost, and average variable cost.

b. At what price is the zero-profit point? At what price is the shutdown point?

c. If the company sells the computers for \(500, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

d. If the firm sells the computers for \)300, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

Why will profits for firms in a perfectly competitive industry tend to vanish in the long run?
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