Question

Assignment 3 8. Short-run and long-run effects of a shift in demand Suppose that the chicken industry is in long-run equilibrium at a price of $5 per kilogram of chicken and a quantity of 500 million kilograms per year. Suppose the Public Health Agency of Canada (PHAC) issues a report saying that eating chicken is bad for your health. The PHAC's report will cause consumers to demand chicken 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 the PHAC's report. Supply Demand Supply PRICE (Dollars per kilogram) - - - - Dernand 0 100 900 1000 200 300 400 500 600 700 800 QUANTITY (Millions of kilograms)

Answer 1

The PHAC announcement causes the quantity of chicken demanded to decrease at every price, shifting the demand curve to the left. In the short run , the number of firms are fixed in the chicken industry is fixed.Therefore, the shift in demand causes a movement along the short run supply curve.The price of chicken decreases, and each firm produces less chicken than before. Because the chicken industry was originally in long run equilibrium , firms were earning zero economic profit before the PHAC announcement . Therefore, a decrease in price would cause firms to run loss.

Hence, The PHAC's report will cause consumers to demand less chicken at every price. In the short run, firms will respond by producing less chicken and running at a loss.

Price (Dollars per kilogram) Dennan 0 100 200 300 Yoo Joobes 900 soo goo 1000 Quantity /millions of Il kilograms)