In 2011, three firms were selling cellular phone service for a price of $40 per month in Erie, Pennsylvania. Each firm serviced 100 cellphone 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 cellphone 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.

Question

Quizplus · Accepted Answer

The price effect refers to the decrease in profits due to the reduction in price from $40 to $30, while the output effect refers to the increase in profits due to the increase in the number of customers from 300 to 350.

In 2011, Three Firms Were Selling Cellular Phone Service for a Price