1. Bagel restaurant is likely to be a constant industry because it is in the perfect competition industry. Bagel restaurant is in the perfect competition industry because there are few entry barriers in this industry. Anyone could enter this industry. In the short-run, existing firms might get profit just as the case of George’s bagel chain. However, in the long-run, the profit attracts new competitors into this industry, causing price competition. Because each firm will produce at the point where P=LRMC, the price competition will force each firm to produce at the lowest point of the LRAC curve.
Thus, each firm in the bagel industry faces the same cost which equals to the price of the bagel, meaning that bagel restaurant is in a constant cost industry. To maximize profit, firms have to produce at the point where P=LRMC. Supply curve shows the corresponding quantity at any given price. Thus, LRMC is the long-run supply curve for each firm. For firms in the constant cost industry, they face a constant LRMC, which implies that the slope of the long-run supply curve is zero. By contrast, increasing cost industry face increasing LRMC curve, which implies that the slope of the long-run supply curve is positive. . Firms that can produce at lower price are those who have lower MC. Lower MC usually implies that these firms hold some superior factors that other firms don’t have. It seems that firms with superior factors can make economic profits. However, other firms will compete for these superior factors in order to also produce at lower cost, which increase the opportunity cost of holding these superior factors. Thus, firms with lower MC can’t make economic profit because the producer surplus from lower MC has been used to acquire the superior factors. 3.
It is a good idea for George to enter the cranberry industry. The reasons are as following: 1)The cranberry industry shows steady growth rate. 2)George has the opportunity to acquire the superior asset in this industry – sandy peat bogs. 3)Sandy peat soil is not readily available in supply, which cause the entry barrier in this industry. Thus, although future profits might attract new competitors into this market as the case in the bagel restaurant, the limited supply of peat bogs makes it difficult for competitors to immediately enter this industry.
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Even the price competition happens in the future, George can still produce at the lower price because he owns the superior asset. Finally, as the case in previous example, although George can produce at lower price, he can make only the normal economic profit. This is because profit will cause competitors to compete for the land, which causes the appreciation of the sandy peat bogs. As a result, the opportunity cost of George’s holding the land will increase, which offset the producer surplus of George.
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