Question

You will need to include both an industry (total market) and a firm (individual business) graph for each question. On the firm graphs, you will need to illustrate demand (d), marginal revenue (MR), marginal cost (MC), average variable cost (AVC), and average total cost (ATC). When you don’t have exact data for a curve, you can still create the curve in relationship to the other curves on the graph.

1. Suppose five years from now that the ranching industry is in long-run equilibrium at 70 cents per pound.

1. Graphically illustrate what that would look like for the ranching industry using side-by-side industry and firm graphs.

2. Then, suppose a new hormone shot is developed at Texas A&M University that allows all ranchers to cut their feed costs by 27 percent if they use this shot.

1. Graphically illustrate the short-run implications of this development in the ranching industry using a new set of side-by-side industry and firm graphs. Explain your answer. 

2. Graphically illustrate the long-run implications of this development in the ranching industry using a new set of side-by-side industry and firm graphs. Explain your answer.

Answer 1

Assuming ranching industry is perfectly competitive, in the long run, firm's equate price (being price takers they accept market price as their own price) with their MC. Since long run profits are zero, ATC equals price (and MC) in long run equilibrium.

In following graph, the left panel depicts the market. D0 & S0 are market demand and supply curves, intersecting at point A with market price P0 and market quantity Q0. The firm accepts P0 as its own price, and produces output level of q0 at point B where P0, ATC and MC intersect. Since the firms are perfectly competitive, Price, demand and MR are equal.

Answer 2