Answer to Question #219869 in Microeconomics for Gilb

Question

a) Airbus makes 50 planes a year, which sell for $50 million each. If Airbus raises its price, Boeing will leave its prices unaltered, so Airbus loses market share. It faces an elastic demand curve. However, if Airbus cuts its price below $50 million, Boeing is forced to match the price cut, so quantity demanded increases only to the extent that additional plane orders are placed when planes are cheaper. Each company faces inelastic demand when it cuts the price.
Draw the demand curve that Airbus thinks it faces. (7 marks)
b) Suppose the wool industry is perfectly competitive.
i) Draw 6 diagrams showing the equilibrium positions of a competitive firm in the short run and in the long-run. (24 marks)
ii) Assuming that a single firm is enjoying abnormal profits, draw another diagram to show the effects of the development of artificial fibres that reduces the demand for wool on the firm’s equilibrium position.

Answer 1

a. In elastic demand a change in prices causes a bigger percentage in demand as shown below

In inelastic demand change in prices causes a small percentage change in demand as shown below

b.$(i)$

1.In this figure equilibrium price and output are shown.$($Rs.50) p DD$_1$ is the demand curve and SS$_1$ is the supply curve

2.The equilibrium price rises form OP to OP, and the equilibrium quantity from OQ to OQ$_1$ as shown below

3.Figure $($ A$)$ has an elastic curve while figure $($ B$)$ has a less elastic curve.

4. The following graphs show the demand curve is less elastic.

$($ ii$)$ The following diagram shows a supernormal profit or abnormal profit. It's in the red shaded area. New firms may not be able to enter and compete.