1. Kennedy & Sons operates in a perfectly competitive market for smoke alarms. Kennedy & Sons is currently

1. Kennedy & Sons operates in a perfectly competitive market for smoke alarms. Kennedy & Sons is currently

earning short-run positive economic profits.

(a) Using correctly labeled side-by-side graphs for the smoke alarm market and Kennedy & Sons, indicate each of the following for both the market and Kennedy & Sons.

(i) Price

(ii) Output

(b) In the graph in part (a) for Kennedy & Sons, indicate the area of economic profits that Kennedy & Sons is earning in the short run.

(c) Using a new set of correctly labeled side-by-side graphs for the smoke alarm market and Kennedy & Sons, show what will happen in the long run to each of the following.

(i) Long-run equilibrium price and quantity in the market.

(ii) Long-run equilibrium price and quantity for Kennedy & Sons.

(d) Assume that purchases of smoke alarms create positive externalities. Draw a correctly labeled graph of the smoke alarm market.

(i) Label the market equilibrium quantity as Qm.

(ii) Label the socially optimum equilibrium quantity as Qs.

(e) Identify one government policy that could be implemented to encourage the industry to produce the socially optimum level of smoke alarms.

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