Question 17 Suppose the market for cantaloupes is currently in long-run equilibr

Question

Question 17 Suppose the market for cantaloupes is currently in long-run equilibrium at a price of $3 per to a sharp decline cantaloupe Answer the following questions a. In the short run, what will happen to the price of cantaloupes? Explain using a diagram b. In the short run, how will firms respond to the change in price described in part (a)? What will happen to the number of firms' profits? Explain using the same diagram hat can we expect to happen to the number of taloupe producers in the long run? d. What will the long run price of cantaloupes be?

Explanation / Answer

A sharp decline due to outbreak will lead to shift n demand to the left and equilibrium price and output, both will fall below the ATC. The firms in the short run the firms will keep operating till the price is above the minimum of AVC. However some firms will exits in view of losses being suffered to the extent of the fixed costs.

The firms in the short run will respond by exiting the industry and consequently the supply curve will shift to the left and price will rise until it becomes equal to ATC again in the long run.

As the firm is in the long run the firm will now be suffering losses beyond its shut down point of minimum of ATC. The firms will start exiting the industry and the supply will go down and price will go up till it equals the ATC in the long run. Therefore the number of firms will fall in this case.

In the long run the price will equal the ATC and MC of the firm.

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