Consider a constant-cost industry that is perfectly competitive and in which the demand curve is downward sloping. Further, starting from a long run equilibrium assume that firms experience an improvement in technology that lowers average total cost but does not change marginal cost. In the long run, we would expect:Group of answer choicesConsumer surplus to increase and producer surplus to remain unchanged.Consumer surplus to decrease and producer surplus to remain unchanged.Producer surplus to increase and consumer surplus to remain unchanged.Producer surplus to decrease and consumer surplus to remain unchanged.More information is required to answer this question.
Question
Consider a constant-cost industry that is perfectly competitive and in which the demand curve is downward sloping. Further, starting from a long run equilibrium assume that firms experience an improvement in technology that lowers average total cost but does not change marginal cost. In the long run, we would expect:Group of answer choicesConsumer surplus to increase and producer surplus to remain unchanged.Consumer surplus to decrease and producer surplus to remain unchanged.Producer surplus to increase and consumer surplus to remain unchanged.Producer surplus to decrease and consumer surplus to remain unchanged.More information is required to answer this question.
Solution
In a perfectly competitive market, an improvement in technology that lowers average total cost (ATC) but does not change marginal cost (MC) will lead to an increase in supply, as firms can now produce the same quantity at a lower cost. This increase in supply will lead to a decrease in the market price.
In the long run, firms will enter or exit the market until economic profit is zero. This means that the decrease in ATC will not lead to an increase in producer surplus, as the decrease in price will offset the decrease in cost.
However, the decrease in price will increase consumer surplus, as consumers can now buy the same quantity at a lower price.
Therefore, the correct answer is "Consumer surplus to increase and producer surplus to remain unchanged."
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