Question

Suppose that you are an analyst of the perfectly competitive market for oranges. The market is in long-run competitive equilibrium.

a.   Draw a graph for one individual firm showing their MC, ATC, and AVC curves. Indicate the quantity they will produce and show profits (if any) on the graph.

b.   Now, imagine that a new orange juice diet craze is sweeping the country; the diet recommends that people replace at least one meal a day with a glass of orange juice. What effect will this have on the market for oranges? Draw a supply & demand graph showing this.

c.   In the short run, what is the effect of this change in the market for oranges on the individual orange firm? Draw a new version of the graph you drew for part a.

d.   In the long run, what is going to happen in the market for oranges? What will happen to the individual orange firm? Draw new graphs for both the industry and firm.

Answer 1