How does bringing the plant online affect your profits? Why? What are your incen

Question

How does bringing the plant online affect your profits? Why? What are your incentives to invest in more plants? What do you think would happen if you took another plant offline? What will happen in the long run?

What makes this outcome more or less likely (e.g., in terms of the shape of the demand curve or in terms of your size relative to the market)?

How are profits of crude producers affected? How are consumers affected? Is this a zero-sum game that simply transfers profits between parties?

9)C apacitv in Perfectly Competitive Markets You own a number of refineries in the US. Both your inputs (crude) and your outputs (gasoline) are traded in perfectly competitive market with price set by supply and demand. One of your largest refineries needed repairs and was taken offline. You can put it back online by checking the box below. Price of gasolinePrice of crude oil Your profit 250 Bring refinery online offine 5.5

Explanation / Answer

Bringing the plant online reduces the total profit by $100(250-150).

In the short-run, my profits get affected as I bring the refinery online because with some repairs the refinery has reduced the cost of production from $5.5 to $5 and the price of final good here(crude oil) is determined by market forces of demand and supply. Also, the number of units of the product demanded by consumers might have reduced owing to the higher price of the final good(crude oil). Hence, the total profit= per unit profit of crude oil * number of units sold by me, have been affected.

Investing in more plants will help me to earn maximum profits in the long-run. As more and more firms will enter the market owing to supernormal profits and this will eventually drive up the price of the factors of production making it scarce. With more investment in plants there will be efficient utilisation of scarce factors of production.

If I took another plant offline, my cost of production will increase and eventually in the long-run I might not be able to optimally utilize scarce resources.

In the long run, the one with the highest market share(relative size, here) will definitely enjoy greater economies of scale and will be able to minimise the cost. Hence, the one with a higher market share is more likely to enjoy greater profits and vice-versa.

The profits of crude oil prices are affected mainly by its own cost of production and also by the quantity of final good demanded by the customers.The prices of output is set by market forces of demand and supply, hence it doesn't have a role to play in impacting the profits.

Consumers are affected as there is no differentiation of the product across producers. All the products available are homogeneous with same prices. Like producers, the consumers too are price-takers.

Yes, this is a case of zero-sum game which leads to pareto optimal results. In this case, the gain of one producer is the loss of any producer.There is no way in which the one can be made better-off without making another worse-off.

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