Question

3. Suppose the market for rolled oats is perfectly competitive and is in a long-run equilibrium. For the following. be sure to carefully label your graphs and use subscripts as we have done in class! You can give your answers for each part on the same graphs. a. Draw the graphs below that illustrate the market and a representative firm in the initial long-run equilibrium (use the subscript 1 to denote each curve). What profits is the representative firm earning? Profits = b. Illustrate the short-run impact of a decrease in the price of dried cranberries (a complement for rolled oats) on your graphs (using the subscript 2 and arrows to denote changes that occur in the short-run). If necessary, assume that the impact of the change is small enough that firms do not choose to shut-down in the short-run. What happens in the long-run that causes the market to reach a new long-run equilibrium? illustrate the new long-run equilibrium in your graphs (using the subscript 3 and arrows to denote changes). What profits do firms earn in this new long-run equilibrium? Profits = Market for Rolled Oats Representative Firm

Answer 1

a Solution Cong Run equilibrium for market is when demand curve intersects Supply Curve Market price em AR-MRP SVPL aut Quantity Qy Quantity . In long run unden perfect competetion, representatieve fim earn only NORMAL PROFITS NO super Normal profits are earned. This is because there is entry and exit ander perfect competeta on. O Equilibrium of firm is when MR² MC ie point ef. 6 price of cranberries decreased price of complementary good → decreased i Demand for rotted dried Cranbevres-> Increase

e demand for volled rates will decrease and demand curve will shift. left wards MC AC AR= MRIP ARIMRh.pl - Quantity firms is in lies Q2 + Quantity will not shat down as this changes short run and shut down point below point e.