Question

Suppose five years from now that the ranching industry is in long-run equilibrium at 70 cents per pound. Graphically illustrate what that would look like for the ranching industry using side-by-side industry and firm graphs. Then, suppose a new hormone shot is developed at Texas A&M University that allows all ranchers to cut their feed costs by 27 percent if they use this shot. Graphically illustrate the short-run implications of this development in the ranching industry using a new set of side-by-side industry and firm graphs. Explain your answer. Graphically illustrate the long-run implications of this development in the ranching industry using a new set of side-by-side industry and firm graphs. Explain your answer.

Answer 1

Answer:

Refer explanation and diagrams

Explanation:

1. The ranching industry exists in the perfectly competitive market where there is ease of entry and exit into and out of the market, as well as many suppliers producing homogeneous products. At an equilibrium of 70 cents per pound, suppliers will be making normal profits, selling at Q1 where the AC, MC and D=AR=MR curves meet (Refer Diagram 1).

2. When feed costs are cut by 27%, it means that the cost of production of these firms will fall. Due to this, the AC curve will shift lower to AC1. At this point, the firms in the ranching industry would be making supernormal profits in the short-run of the area shaded in the diagram (Refer Diagram 2).

3. In the long run, seeing these super normal profits, new firms would be encouraged to enter into the market. The ease of entry nature of perfect competition will result in the supply curve shifting from S to S1. Hence, industry equilibrium quantity moves from Q1 to Q2. This causes a fall in price from 70 cents to Pe. Thus, in the long-run, firms will go back to producing at normal profits once again. (Refer Diagram 3).