Consider the long-run production of shirts. The cost of the indivisible inputs used in the production of shirts is $500 per day. To produce one shirt per day, the firm must also spend a total of $4 on other inputs-labor, materials, and other capital. For each additional shirt, the firm incurs the same additional cost of $4.
Consider a college town where the initial price of rental apartments is $500 and the initial quantity is 3,000 apartments. The price elasticity of demand for apartments is 1.25, and the price elasticity of supply of apartments is 0.75.
Compute the average cost for 20 shirts, 50 shirts, 100 shirts, and 500 shirts. (3 marks)
Draw the long-run average cost curve for 20 to 500 shirts per day. (2marks)
Use demand and supply curves to show the initial equilibrium, an label the equilibrium point a. (3 marks)
Suppose that an increase in college enrollment is expected to increase the demand for apartments in the college town by 30 percent. Use your graph to show the effects of the increase in demand on the apartment market. Label the new equilibrium point b. (4 marks)
Predict the effect of the increase in demand on the equilibrium price of apartments. (4 marks)
Find the new equilibrium quantity given the new price. (4 marks)
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