Suppose that the tuna industry is in long-run equilibrium at a price of $5 per c

Question

Suppose that the tuna industry is in long-run equilibrium at a price of $5 per can of tuna and a quantity of 300 million cans per year. Suppose that WebMD claims that a protein found in tuna will increase your expected life span by 3 years.

1.WebMD’s claim will cause consumers to demand ______(less/more) tuna at every price. In the short run, firms will respond by

A.producing the same amount of tuna and earning positive profit

B.exiting the industry

C.producing the same amount of tuna and running at a loss

D.producing more tuna and earning positive profit

E.producing less tuna and running at a loss

F.entering the industry

Explanation / Answer

The problem is related with production and consumption of Tuna. The idustry is in long run equilibrium.So resources are used to their optimum capacity. Hence production is optimum and constant. No further increase in production is possible. Total Tuna production will remain at 300 million cans per week.

In this situation, it has been claimed that protein of Tunna will increase life by 3 years. It will increase demand of Tuna. Curve will shift to the right. But no extra production is possible. So same quantity will be sold at higher price. Economic profit will rise.

The diagram shows that due to right shift of demand curve from D1 to D2, price will move up to P2, but quantity will remain the same.

Thus statement A is correct.

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