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Assume that the gold-mining industry is competitive.a. Illustrate a long-run equilibrium using diagrams for the gold market and for a representative gold mine.b. Suppose that an increase in jewelry demand induces a surge in the demand for gold. Using your diagrams, show what happens in the short run to the gold market and to each existing gold mine.c. If the demand for gold remains high, what would happen to the price over time? Specifically, would the new long-run equilibrium price be above, below, or equal to the short-run equilibrium price in part (b)? Is it possible for the new long-run equilibrium price to be above the original long-run equilibrium price? Explain.
Solution:- a) The market equilibrium occurs where supply equals demand. A price of $20 is a long run equilibrium if the firm earns zero economic profit. b) Market price will increase (to 25 in my graph). Industry output will increase. Firms demand will shift up. c) Firms respond to positive profit by entering the market. Supply shifts out to right, driving down the market price. New equilibrium will be established where P=20 and firms again earn zero…

economic profit. If the industry is an increasing cost industry then as the number of firms increases, input prices are bid up. Hence, the cost curves of an individual firm shift up. The long run supply in this case is upward sloping and the new long run equilibrium price will be above the original price.



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