Suppose the market for coffee, a price-taker market and a constant-cost industry, is initially in long-run...
Suppose the market for coffee, a price-taker market and a constant-cost industry, is initially in long-run equilibrium and that there is an unanticipated decrease in demand for coffee.
As a result, the short-run market price of coffee will ___________(remain unchanged, decrease). In the long run, the market price of coffee will __________(increase, decrease, remain unchanged)
Homework Answers
ANswer
Decrease
remain unchanged
========
The decrease in demand shifts the demand curve to the left and decreases output and price in the market.
The decrease in the price creates losses for some of the firms and the firms exit the market up to the price get back to the same level as the industry is a constant cost industry so the price is the same for the long run as the LRATC is horizontal.
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