Use the following scenario to answer the following questions:
In 2011,three firms were selling cellular phone service for a price of $40 per month in Pittsburgh,Pennsylvania.Each firm serviced 100 cell phone customers; thus,all firms together serviced a total of 300 customers.In 2012,five firms were selling cellular phone service for a price of $30 per month.Each firm serviced 70 cell phone customers; thus,all firms together serviced a total of 350 customers.Assume marginal cost is $0 (zero)for all firms and thus total revenue is equal to total profit.
-Due to the entrance of two firms in 2012,total monthly profits for all firms in the market decreased by $3,000 due to the ________ effect and increased by $1,500 due to the ________ effect.
A)
Price; output
B) output; price
C) price; price
D) output; output
E) competitive; noncompetitive

Question

Quizplus · Accepted Answer

The price effect refers to the decrease in profits due to lower prices caused by increased competition from the two new firms. The output effect refers to the increase in profits due to the additional revenue generated from serving more customers. Therefore, the correct answer is A) Price; output.

Use the Following Scenario to Answer the Following Questions