<p>Before I answer questions, please note that in question 1, part c, when I said that “output increases” I meant that it increases for the industry due to entry. However, output for individual firms that were already making an economic profit will decrease because P=MR will decrease.</p>
<p>Answering questions:</p>
<p>Sorry, asc3nd your Econ teacher sucks. I don’t care what he/she/it(?) said or what God told you.</p>
<p>To drake/addiction, definitely incurring a loss. My bad. Same box though.</p>
<p>To diehardscubsfan, in response to question: “Since a lump-sum subsidy does not depend on quantity, what incentive do firms have to produce more?”</p>
<p>Answer = There isn’t an incentive to produce more, but there’s an argument to be made that they will produce less because supply will shift to the right even in the short-run. Here’s the argument:</p>
<p>The subsidy will shift ATC to left closer to AVC. Firms have no incentive to produce more/less in very short-run b/c MR doesn’t change in very short-run. However, you could make an argument that quantity will be affected in the medium short-run even before other firms have entered the industry. If the lump-sum subsidy decreases production costs, it could also decrease industry price because firms have “room” to try to undercut each other (i.e. firms have the ability and a motive to lower prices so that they have a competitive advantage). This decrease in input costs and its resultant undercutting would lower P=MR for the industry and cause an individual firms’ output to decrease in the medium short-run, even before other firms have entered. In other words, even without entry/exit in the marketplace the price will still fluctuate based on input costs because there is still competition between firms to keep prices low (so that they can sell more). This answer is not the basic answer that they were probably looking for so don’t worry about it – I’m just saying you can argue that too and it is technically correct. In more advanced economic courses they address the “very short-run,” “medium short-run,” etc.</p>