Suppose that the market for eggs is perfectly competitive in Fayette Coutny and

Question

Suppose that the market for eggs is perfectly competitive in Fayette Coutny and that a study is released indicating that the cholesterol absorbed in consuming eggs is not as detrimental to one's health as previously thought. As a result, a permanent rise in the market demand for eggs occurs. As a result of this change: The short run profits of a typical egg farmer will rise; the typical egg farmer will increase egg production in the short run; and the long run market output will be higher. The short run profits of a typical egg farmer will rise; the typical egg farmer will decrease egg production in the short run; and the long run market output will be higher. The short run profits of a typical egg farmer will fall; the typical egg farmer will increase egg production in the short run; and the long run market output will be higher. The short run profits of a typical egg farmer will fall; the typical egg farmer will decrease egg production in the short run; and the long run market output will be higher.

Explanation / Answer

This permanent rise in the market demand for eggs will raise the price of eggs in the market.

Given the cost, this rise in price of eggs will increase the profit of a typical egg farmer. This increase in profit will induce the egg farmer to increase egg production in short-run.

Moreover, this increase in profit will induce the new firms or farmers to enter market for eggs.

This entry will remain continue until supply get increased to such a level that all economic profit gets eliminated and only normal profit remains.

However, this entry of new farmers will result in output being higher in long-run.

So, the correct answer is option (1).

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