Question

Suppose that the tuna industry is in long-run equilibrium at a price of $ 5 per can of tuna and a quantity of 200 million cans per year. Suppose that WebMD claims that the bacteria found in tuna will decrease your expected life span by 5 years.

WebMD's claim will cause consumers to demand _______ tuna at every price. In the short run, firms will respond by _______ .

On the graph below, shift the demand curve, the supply curve, or both on the following diagram to illustrate these short-run effects of WebMD's claim.

In the long run, some firms will respond by _______ until _______ .

On the graph below, shift the demand curve, the supply curve, or both on the following diagram to illustrate both the short-run effects of WebMD's claim and the new long-run equilibrium after firms and consumers finish adjusting to the news.

The new equilibrium price and quantity suggest that the shape of the long-run supply curve in this industry is _______ in the long run.

Answer 1

Part A

Less

Producing less tuna and running at a loss

Explanation

The WebMD claims caused the demand for Tuna decrease in the short run. But no change in the long run. So, the demand curve will be shifted to the right.

From the claim, the price of Tuna decrease in the short run, which means that the firms in the industry loss. In the short run, the number of firms in this industry is fixed. But in the long run, firms earning loss would exit from the industry. So the supply curve shifted to the left and increased the short-run equilibrium price.

10 Supply Price 8 7 6 5 4 3 Demand 2 D1 1 400 40 80 120 160 360 200 240 280 320 Quantity

Part B

Exiting the industry

Each firm in the industry is once again earning zero profit

Horizontal

Explanation

Over the long run, firms enter or leave the market until profit is equivalent to zero or when the price is equivalent to the base of the average total cost. At the point when all organizations have indistinguishable cost structures, the since quite a while long-run market supply curve is level at this value because no other price can support the zero-profit condition for all firms.

Nonetheless, when the cost structure of firms differs, it is workable for the since quite a while long-run market supply curve to be upward inclining. For this situation, the long run condition requires that in any event, the marginal firm (the last firm to enter or leave the market) wins zero profit. The market arrives at since a long-run balance when it would not be gainful for any extra firms to enter or leave this market regardless of whether existing firms with lower costs are making a positive profit in the short run.

10 Supply Price 8 7 6 5 4 3 Demand 2 D1 1 400 40 80 120 160 360 200 240 280 320 Quantity