Question

If there is bad news that eating too many potato can cause cancer. What will happen in both short run and long run? Describe how that industry adjusts to this situation. Explain your answer graphically, showing both the typical potatoproducing firm's marginal cost and average total cost curves, as well as the market supply and demand curves. Distinguish between the short run and the long run.

Answer 1

Answer: With the bad news of eating too many potatoes can cause cancer, the demand of the potatoes will suddenly decrease.

Short Run:

In short run the demand curves will shift to left. Equilibrium (New equilibrium point B) Price and Quantity will decrease as the demand will decrease. Which will result in Loss.

Long Run:

From the above figure it is seen that the supply curve will also shift to left in long run.

Price will go back to equilibrium (New equilibrium point is C), the same equilibrium price which was before the news. Quantity will further decrease, as can be seen at point C.

At this point there will be no loss or gain.