Question

On August 5, 2003, a tragic fire destroyed a large Jim Beam whiskey factory in Kentucky. Assume that the U.S. market for whiskey is perfectly competitive, and that the market was originally in long run equilibrium. What would be the effects of such an incident

Answer 1

Answer:

Price of the whiskey would remain unchanged and the existing firms would continue to earn zero economic profit

Explanation:

In a perfectly competitive market, the market comprises of large number of sellers selling homogeneous products. The equilibrium is arrived at by the interaction of forces of market demand and supply and thus no single seller controls the output or influences the price.

The firms represent price takers in such form of markets.

Another major feature of this form of market being free entry and exit of firms which means existing firms can exit and new firms can join as there are no restrictions.

In the long run, firms earn zero economic profits in case of perfect competition.

In the given case, a huge factory of one of the leading producers of alcohol has been destroyed. The market being in long run equilibrium with zero economic profits, it means the incident will not in any way affect pricing and quantity as this will encourage new firms to enter liquor production market selling at lower price which would restore the equilibrium to it's original.