Question

Suppose the book-printing industry is competitive and begins in a long-run equilibrium. Then Hi-Tech Printing Company invents a new process that sharply reduces the cost of printing books.

Suppose Hi-Tech’s patent prevents other firms from using the new technology.

Which of the following statements are true about what happens in the short run?

Answer 1

Hi-Tech printing company invents a new process that reduces the cost of printing books. So, there is a fall in Hi-Tech's marginal cost or we can say that it's marginal cost (MC) curve shifts downward. Also there is a fall in average total cost curve (ATC) or we can say that ATC curve shifts downward. Price of books remains the same, because other firms can't use the new process as they are prohibited by the Hi-Tech's patent. Profits will increase as the cost of printing books is less than price.

So the points are as follows:

1) Marginal Cost curve shifts downward.

2) Average Total Cost curve shifts downward.

3) Price of books remains the same.

4) Profits increase.