Chapter 10

1. An increase in demand will manifest itself as a rightward shift in the demand curve, and a rightward shift

in marginal revenue. The shift in marginal revenue will cause a movement up the marginal cost curve to

the new intersection between MR and MC at a higher level of output. The new price can be read by drawing

a line up from the new output level to the new demand curve, and then over to the vertical axis. The new

price should be higher. The increase in quantity will cause a movement along the average cost curve to a

possibly higher level of average cost. The price, though, will increase more, causing an increase in total
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profits.

2. As long as the original firm is earning positive economic profits, other firms will respond in ways that take

away the original firm’s profits. This will manifest itself as a decrease in demand for the original firm’s

product, a decrease in the firm’s profit-maximizing price and a decrease in the firm’s profit-maximizing
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