Suppose that Keystone is a firm in perfectly competition ski resort business. If all Keystone’s input price unexpectedly double, and at the same time the product price doubles, what will happen to Keystone profit-maximizing level of output and its profit in the short run? In the long run? (Assume Keystone begin from a position of long run equilibrium.)
Do a little research, and then take a shot. What do you think?
Hint, how would the average cost curve change if all input prices changed by the same factor (e.g., doubled)?
What does the demand curve for a single firm in a perfectly competitive industry look like; and how would it look if the output price changed (e.g., doubled)
average cost will curve up
To determine the impact on Keystone's profit-maximizing level of output and profit in the short run and long run, we need to consider the concepts of short-run and long-run equilibrium in perfectly competitive markets.
In the short run:
When the input prices double, it means that Keystone's costs of production increase. However, when the product price also doubles, it implies that the revenue per unit sold also increases. In the short run, Keystone has a fixed level of plant capacity or fixed inputs, and it cannot easily alter its production process.
As a profit-maximizing firm, Keystone will adjust its level of output considering the price and costs. In this case, since the revenue per unit has doubled, Keystone might find it profitable to increase its level of output to take advantage of the higher price. However, due to the doubling of input prices, Keystone's costs have also increased. It's important to compare the increase in revenue with the increase in costs to determine the overall impact on profit.
If the increase in revenue is greater than the increase in costs, Keystone's profit will increase. Conversely, if the increase in costs is greater than the increase in revenue, Keystone's profit will decrease. The exact impact on profit will depend on the specific cost and revenue figures.
In the long run:
In the long run, firms have the flexibility to adjust their plant capacity or inputs. If Keystone is initially in long-run equilibrium, it means that it is already operating at its profit-maximizing level of output with given input and product prices.
When input prices double, the cost of production increases significantly. In response, Keystone might consider reducing its level of output because the higher cost would make it less profitable to produce at the same level. By decreasing output, Keystone can reduce its costs and attempt to maintain profitability in the face of higher input prices.
However, it's important to note that in the long run, other firms in the industry are also affected by the same input price increase. This could lead to an increase in industry-wide costs, which may impact the product price in the long run. If the product price adjusts higher due to increased costs, Keystone might still be able to maintain its profit-maximizing level of output and profit. Conversely, if the product price does not increase enough to compensate for the higher input costs, Keystone might need to further reduce its output and accept lower profit margins.
Overall, the precise impact on Keystone's profit-maximizing level of output and profit in the short run and long run can only be determined by considering the specific cost and revenue figures as well as the market dynamics of the ski resort business.