Business competitiveness in a free market

12. You are the manager of a small U.S. firm that sells nails in a competitive U.S. market. The nails you sell are a standardized commodity; buyers view your nails as identical to those available from hundreds of other firms. You are concerned about two events you recently learned about through trade publications: (1) the overall market supply of nails will decrease by 2 percent due to exit by foreign competitors; and (2) due to a growing U.S. economy, the overall market demand for nails will increase by 2 percent.

a. Draw the pair of diagrams summarizing the initial situation for a competitive firm in a competitive market.
Indicate the initial market price as $5 per box of nails. One firm depicts the market for nails and one diagram
the firm.

b. Show the impact of the exit of foreign competitors and the growing economy in the market diagram. Illustrate
the impact on market price and market quantity.

c. Based on your answer to (12b), illustrate the impact for the firm’s price and output level based on the changes
indicated in the market diagram. Answer the following question in your diagram: Should the firm plan to
increase or decrease production of nails?