7. Short-run and long-run effects of a shift in demand Suppose that the chicken

Question

7. Short-run and long-run effects of a shift in demand Suppose that the chicken industry is in long-run equilibrium at a price of $5 per pound of chicken and a quantity of 300 million pounds per year. Suppose the Surgeon General issues a report saying that eating chicken is bad for your health The Surgeon General's report will cause consumers to demand chicken at every price. In the short run, firms will respond by 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. 10 Supp Demand Supply 4 mand 0 60 120 180 240 300 360 420 480 540 600 QUANTITY (Millions of pounds)

Explanation / Answer

The surgeon general report will cause less chicken demanded at every price. In the short run firms will respond by producing less chicken and running at loss. In the long run some firms will respond by exiting the industry until each firm in the industry is once again earning zero profit.

The new equilibrium price and quantity suggest that the slope of the long run supply curve in this industry is upward sloping in the long run

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