Solved: 1 As the total output of a constant cost industry

increases

1. As the total output of a constant-cost industry increases, ________the cost does not change,
so the long-run supply curve is _______ (horizontal/ positively sloped/negatively sloped).
2. A constant-cost industry consumes a relatively _______ (small/large) amount of inputs such
as labor and materials, so as industry output increases the prices of these inputs _______
(increase/ decrease/don t change).
3. Arrow up, down, or horizontal: In a constant-cost industry, when demand increases the long-
run equilibrium price_______.
4. Arrows up, down, or horizontal: Hurricane Andrew_______ the demand for ice. In the short
run, the price_______ by a relatively large amount. In the long run, the price_______ relative to
the prehurricane price.
5. The Price of Haircuts. The haircutting industry in your city uses a tiny fraction of the
electricity, scissors, and commercial space available on the market. In addition, the industry
employs only about 100 of the 50,000 people who could cut hair.
a. Draw a long-run supply curve for haircutting in your city.
b. Suppose the initial equilibrium price of haircuts is $12. Draw demand and supply graphs to
show the short-run and long-run effects of an increase in population. Does population growth
affect the long-run equilibrium price of haircuts?
6. Butter Prices. Several years ago, people became concerned about the undesirable health
effects of eating butter. The demand for butter dropped, decreasing its price. Some time later,
the price of butter started rising steadily, although demand hadn’t been changing. After several
months of price hikes, the price of butter reached the price observed before demand decreased.
A blogger suggested that the rising price of butter was evidence of a conspiracy on the part of
butter producers. Provide an alternative explanation for the rising price of butter and its eventual
return to the original price.
7. The Price of Tattoos. According to a market expert, tattooing in your city is a constant-cost
industry. The initial equilibrium price is $24.
a. Arrows up or down: In the long run the wage of tattoo artist’s _______as industry output
increases.
b. If the demand for tattoos doubles and stays at the higher level for three years, the price of
tattoos three years from now will be $_______ .
c. Show the change in (b) using a supply-demand graph.

ANSWER
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