Question

Short-run and long-run effects of a shift in demand

Suppose that the tuna industry is in long-run equilibrium at a price of $5 per can of tuna and a quantity of 400 million cans per year. Suppose the Surgeon General issues a report saying that eating tuna is bad for your health.

Part 1) The Surgeon General’s report will cause consumers to demand: a) more b) less tuna at every price.

Part 2) In the short run, firms will respond by: a) producing less tuna and running at a loss b) producing more tuna and earning positive profit c) entering the industry d) exiting the industry e) producing the same amount of tuna and earning positive profit f) producing the same amount of tuna and running at a loss

Shift the demand curve, the supply curve, or both on the following diagram to illustrate these short-run effects of the Surgeon General’s report.

Part 3) In the long run,  some firms will respond by: a) producing less tuna and running at a loss b) producing more tuna and earning positive profit c) entering the industry d) exiting the industry e) producing the same amount of tuna and earning positive profit f) producing the same amount of tuna and running at a loss

until: a) new technologies are discovered that lower costs b) each firm in the industry is once again earning zero profit c) tuna populations grow large enough to support more firms d) consumer demand returns to its original level

Part 4) The new equilibrium price and quantity suggest that the shape of the long-run supply curve in this industry is: a) upward sloping b) horizontal c) downward sloping d) vertical in the long run.

Answer 1

Suppose that the tuna industry is in long-run equilibrium at a price of S5 per can of tuna and a quantitv of 400 million cans per vear Suppose the Surgeon General issues a report saying that eating tuna is bad for your health Part 1) The Surgeon General's report ill cause consumers to demand less tuna at every price. The report threatens the consumer group in the economy that consumption of tuna is bad for health. Part 2) In the short run, firms will respond by producing less tuna and running at a loss because a decrease in price would cause firms to be running at a loss. In the short run, the number of firms in the tuna industry is fixed. Therefore, the shift in demand causes a movement along the short-run supply curve. The price of tuna decreases, and each firm produces less tuna than before. The graph is as follows 10 Supply Demand 0 80 160 240 320 400 480 560 640 720 800 QUANTITY (Millions of cans)

Part 3) In the long run, some firms will respond by exiting the industry until each firm in the industry is once again earning zero profit Part-4) The new equilibrium price and quantity suggest that the shape of the long-run supplv curve in this industry is horizontal in thelong run Because the tuna indu profit before the Surgeon General's announcement. Therefore in the long run, some firms will respond bv exiting the industrv "until each firm in the industrvis once again earming zero profit" stry was originally in long-run equilibrium, fıms were earning zero The graph is as follows 10 Supply LRIS 0 Demand 0 80 160 240 320 400 480 560 640 720 800 QUANTITY (Millions of cans)