DSE 2007 23 & 24

[X]

23. I think Prafull is compensated Rs. 100, because whereever he lives, he must be compensated with that money, and as the least distance can be 0.1, he should get 1*1/(0.1)^2=100. Is my reasoning correct?

24. I can't understand how are we guaranteed that some firms must remain in the industry. How is the possibility of industry close down ruled out?

[mrittik]

23. ur reasoning is correct.

24. If the Industry is shut down then how some product will be possible. There is production but the scale of production has been diminished because of some company left from Industry.

[X]

Thanks mittrik.

Please let me know in Q24, how we get to know that production is not going to be 0 in long run? PLEASE!!

[Homer Simpson]

I reasoned as follows - In the long run, where price is 10, the individual firm wants to supply 400 units meaning that market supply is 400,000 but market demand happens to be 300,000 actually.

Some existing firms wont be able to sell at all but cant even cut prices - therefore, it makes sense for some firms to exit the industry. Ideally, there should be about 750 firms remaining at that particular structure with each firm supplying 400 units to meet the market demand of 300,000 while breaking even.

That eliminates (c) and (b).

Now the question of the industry itself shutting down- wont happen unless every firm finds that it is operating at losses (P< min AC) and hence has to imperatively exit. This eliminates (d) and hence, (a) is the answer.

[mrittik]

gracias tsuki...thats the apt reasoning in LR....

[Granpa Simpson]