1. World palm oil consumption has been in decline over the past several years as consumers have become more sensitive to the destruction of the rainforest to harvest palm oil. Assume that the palm oil industry is perfectly competitive and consists of firms with U-shaped long-run average cost curves. Suppose the industry was in long-run equilibrium before the decline began. Now consider a permanent downward shift in demand for palm oil. Assume this is a constant cost industry. Compared to the original long-run equilibrium, will the market equilibrium price and output per firm rise, fall, or stay the same in the short run? Compared to the original long-run equilibrium, will the market equilibrium price and output per firm rise, fall, or return to the original equilibrium level in the long run? Explain the dynamic adjustment process from the original long-run equilibrium to the new long-run equilibrium. No graph is required. Circle your final answers for price and quantity below. (2 points each for each correct answer circled below and remaining 7 points for explaining the adjustment process.)
Short-Run CIRCLE YOUR ANSWER FOR EACH
Market Equilibrium Price will Rise Fall Remain constant
Output per Firm will Rise Fall Remain constant
Long-Run
Market Equilibrium Price will Rise Fall Return to original level
Output per Firm will Rise Fall Return to original level
Ā
1. World palm oil consumption has been in decline over the past several years as consumers have become more sensitive to the destruction of the rainforest to harvest palm oil. Assume that the palm oil industry is perfectly competitive and consists of firms with U-shaped long-run average cost curves. Suppose the industry was in long-run equilibrium before the decline began. Now consider a permanent downward shift in demand for palm oil. Assume this is a constant cost industry. Compared to the original long-run equilibrium, will the market equilibrium price and output per firm rise, fall, or stay the same in the short run? Compared to the original long-run equilibrium, will the market equilibrium price and output per firm rise, fall, or return to the original equilibrium level in the long run? Explain the dynamic adjustment process from the original long-run equilibrium to the new long-run equilibrium. No graph is required. Circle your final answers for price and quantity below. (2 points each for each correct answer circled below and remaining 7 points for explaining the adjustment process.)
Short-Run CIRCLE YOUR ANSWER FOR EACH
Market Equilibrium Price will Rise Fall Remain constant
Output per Firm will Rise Fall Remain constant
Long-Run
Market Equilibrium Price will Rise Fall Return to original level
Output per Firm will Rise Fall Return to original level
Ā
