Question

8. Short-run and long-run effects of a shift in demand Suppose that the turkey Industry is in long-run equilibrium at a price of $5 per pound of turkey and a quantity of 200 million pounds per year. Suppose the Surgeon General issues a report saying that eating turkey is bad for your health The Surgeon General's report will cause consumers to demand turkey at every price. In the short run, firms will respond by yraph to illustrate these short-run effects of the Surgeon General's report. producing less turkey and running at a loss entering the industry producing more turkey and earning positive profit exiting the industry producing the same amount of turkey and earning positive profit producing the same amount of turkey and running at a loss Demand (punc Supply

Answer 1

Ans.
a) This negative report of consuming turkey will make people to demand less turkey at each price level shifting the demand curve to the left.

b) This decrease in demand will decrease the price level and equilibrium quantity in the market at given supply of turkey. Also, because initially the market was in long run equilibrium, the firms were earning a zero economic profit. Thus, a decrease in price leads to a loss at lower equilibrium quantity.

c) In long run, the firms will respond by exiting the market. This will decrease the aupply of turkey in the market increasing the price level to initial level and decreasing the quantity. This exit of firms will continue till price increases to the level where each firm again is earning a zero economic profit.

d) So, equilibrium quantity in the market reduced but price remained the same, thus, in perfectly competitive market any quantity can be supplied at given price level making long run supply curve horizontal.

Thank you

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