Question

The accompanying graphs represent the market for soybeans, a perfectly (purely) competitive market, and Roy's Soys, an individual firm in the market for soybeans. The market and the firm are currently in long-run equilibrium at point A. Soybean market Roy's Soys 20 20 Price 2 B Price 3T Short-run supply 18- 17 16 15 17 15 13 12 13 12 Average total cost ng-run supply Price 4 4 3- 3- Demand 0 1 2 3 4 5 67 8 9 10 11 12 13 14 15 16 17 18 19 20 0 1 2 3 4 5 67 8 9 10 11 12 13 14 15 16 17 18 19 20 Quantity (millions of bushels) Quantity (hundreds of bushels) 1. Show what happens in the short run on both graphs when a new medical study shows soybeans to be highly carcinogenic. On the market graph, you will shift a curve or curves. On the firm's graph, use Price 2 to draw a new price line for the firm. On both graphs, indicate the new equilibrium point with point B 2. Now, show the changes that get both graphs back to long-run equilibrium. Use shift(s) for the market and Price 3 for the firm. Indicate the new long-run equilibrium with point C.

Answer 1

Demand decreases and shifts to the left. At new equilibrium , price is lower. 2) Due to lower price, sellers exit from the market resulting in leftward shift in supply curve. Price increases back to initial level. For the fixed price = price 3. Point A is equal to point C.