Question

Suppose that the shrimp industry is in long-run equilibrium at a price of $5 per pound of shrimp and a quantity of 250 million pounds per year. Suppose the Surgeon General issues a report saying that eating shrimp is good for your health.

Answer 1

Given that the shrimp industry is in the long-run equilibrium at a price $5 per can and a quantity of 250 million pounds per year The Surgeon General's report will cause consumers to demand more shrimp at every price. In the short run, firms will respond by producing more shrimp and earning positive profit. a

Below graph shows the short run effect of the Surgeon General's report 10 8 DI 2 0 100 150 200 250 300 350 400 450 500 Quantity (Millions of pounds) 50 From the above graph it can be observed that there is a shift in the demand curve to the right. This results in an increase in the price and quantity of cans. 1D te n Price (Dollars per pound)

In the long run some firms will respond by entering the industry until each firm in the industry is once again earning zero profit. Below graph shows the long run effect of the Surgeon General's report 10 9 SI 7 DI 2 D 100 150 200 250 300 350 400 450 500 Quantity (Millions of pounds) 50 The new equilibrium price and quantity suggest that the shape of the long run supply curve in this industry is Horizontal in the long run. Price (Dollars per pound)