Question

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8. Short-run and long-run effects of a shift in demand

Suppose that the turkey industry is in long-run equilibrium at a price of $5 per pound of turkey and a quantity of 250 million pounds per year. Suppose the Surgeon General issues a report saying that eating turkey is good for your health.

The Surgeon General’s report will cause consumers to demand    turkey at every price. In the short run, firms will respond by    .

Shift the demand curve, the supply curve, or both on the following graph to illustrate these short-run effects of the Surgeon General’s report.

In the long run, some firms will respond by    until    .

Shift the demand curve, the supply curve, or both on the following graph to illustrate both the short-run effects of the Surgeon General’s report and the new long-run equilibrium after firms and consumers finish adjusting to the news.

The new equilibrium price and quantity suggest that the shape of the long-run supply curve in this industry is    in the long run.

Answer 1

So, here turkey industry is in LR equilibrium, => “P=5” and the “Q=250million”. Now, the Surgeon’s report will causes consumers to demand “increase” turkey at every price. In the SR firms will respond by “increasing price and quantity supplied”. Consider the following fig, where the demand will shift by “100 million pound” for each possible price.

S1 E2 E1 D2 250 350

So, here “D2” be the new demand curve, => the new equilibrium price and the quantity demanded are “P=7” and “q=350 million pound”.

Now, in the LR some firms will respond by “increasing supply” until “price reach to the LR equilibrium level”. Consider the following fig where the supply curve will shift to “S2”, => the new LR equilibrium is “E3”, => the LR industry supply curve is perfectly elastic through "E1" and "E3".

S1 S2 E2 ЕЗ LRAS E1 D2 D1 250 350

The new equilibrium price and the quantity suggest that the shape of the LR supply curve in this industry is “horizontal or perfectly elastic” in the LR.