Consider the following facts listed below. For purposes of this problem, simply take these facts as given and do not bring in/draw upon information not presented in this list of facts. [Throughout the problem, you may assume that the firm purchases inputs to production in perfectly competitive input markets, so each firm faces input supply schedules that are perfectly elastic (horizontal).]
Fact 1: The personal computer market is a perfectly competitive market. [This means that price = marginal cost = minimum average total cost in long-run equilibrium, and that there is free entry and exit. In the product market, the firm takes the price of personal computers as given (faces a horizontal demand curve.)]
Fact 2: Entry of new firms into the personal computer industry does not affect the price of inputs used by the industry. [This means that the personal computer industry is characterized as a constant-cost industry.]
Fact 3: Personal computers have become more popular in the last ten years. [In the market for personal computers, the industry demand curve has shifted out (demand has increased).]
Fact 4: The cost of production for computers has decreased due to technological innovations.
Suppose the personal computer market was in an initial long-run equilibrium ten years ago and is in a long-run equilibrium today. Use long-run equilibrium analysis to answer the following questions.
5.1: Can you explain the data (increase in production and decrease in prices) using the first three facts (Facts 1,2 and 3) mentioned above?
5.2: Can you explain the data based only on Facts 1,2 and 4 mentioned above
5.3: Answer the question posed in Question 5.2 above again, but instead of supposing the personal computer industry is a constant-cost industry, this time suppose the personal computer industry is a decreasing-cost industry.
A decreasing-cost industry is investigated here.