Question

Suppose that the chicken industry is in long-run equilibrium at a price of $5 per pound of chicken and a quantity of 50 million pounds per year. Suppose the Surgeon General issues a report saying that eating chicken is bad for your health.

Part 1: The Surgeon General’s report will cause consumers to demand a) more b) less chicken at every price.
Part 2: In the short run, firms will respond by a) producing less chicken and running at a loss b) producing more chicken and earning positive profit c) entering the industry d) exiting the industry e) producing the same amount of chicken and earning positive profit f) producing the same amount of chicken and running at a loss.

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.


10 9 Supply Supply a 5 Demand 0 1020 30 40 50 60 70 80 90 100 QUANTITY (Millions of pounds)

Part 3) In the long run,  some firms will respond by: a) producing less chicken and running at a loss b) producing more chicken and earning positive profit c) entering the industry d) exiting the industry e) producing the same amount of chicken and earning positive profit f) producing the same amount of chicken and running at a loss

until: a) new technologies are discovered that lower costs b) each firm in the industry is once again earning zero profit c) chicken populations grow large enough to support more firms d) consumer demand returns to its original level

Part 4) The new equilibrium price and quantity suggest that the shape of the long-run supply curve in this industry is: a) upward sloping b) horizontal c) downward sloping d) vertical in the long run.

Answer 1

Part 1: Less (Eating chicken is considered bad so, mu m and decreases) part 2: (a) producing less chicken and running at a loss (Due to decreases in demand, quality supplied decreases which causes loss) (Decrease in demand shown here) part 3: (d) exiting the industry until (b) each firm in the industry is once again earning zero profit (In the long run, some firms exit due to losses so that each existing firm again earns economic profit) (supply decreases as firms exit in long run) part 4 (b) horizontal (As price remains $ 5 in long run, so it is horizontal)

Answer 2

Note: Different variants of the above problem to the solution below, please make sure that the problem you are exactly the same as the one posted above. are available with students. Before referring seeking a solution for is

Part 1) The report will cause consumers to demand less chicken at every price. The demand curve will shift leftwards as shown in the following figure: 10 Supply 8 Demand 2 New demand 10 20 340 50 60 70 80 90 100 QUANTITY (Millions of pounds) Part 2) The leftward shift in the demand curve will cause market price to fall. The fall in price will cause the firms to make losses, and the fall in the price will also cause the profit maximizing level of output of each firm to fall. Therefore, in the short run, firms will respond by producing less chicken and running at a loss. PRICE (Dollars per pound) O

Part 3) In the long run, some firms will respond by exiting the industry until each firm in the industry is once again earning zero profit This will cause the supply curve to shift leftwards until the price is back to its initial level 10 New supply Supply 8 7 Demand 2 10 20 30 40 50 60 70 80 90 100 QUANTITY (Millions of pounds) Part 4) Since the new equilibrium price is the same as the old one, the long-run supply curve is horizontal PRICE (Dollars per pound)