Question

1. Assume the apple industry is a perfectly competitive and all firms in the market are currently earning a zero-economic profit. A scientific study comes out that says that an apple a day increases your risk of cancer. (4 pts.)
   1. Will this cause the market price of apples to increase, decrease, or remain the same?
2. 2. In the short-run, will this cause the profit for the firms currently in the market to increase, decrease, or remain the same?
3. 3. In the long-run, will the profit firms earn be a positive, negative, or zero economic profit? Briefly explain your answer.

Answer 1

a) As the report in the market about the apples are adverse, that will decrease the demand for the apple and shift the aggregate demand curve to the left, the new equilibrium will be at a lower price and lower output.

b) It will decease the profit of the firm in the short run as the demand for the goods and the price have fallen.

c) As the market is making a loss in the short run, in the long run some firm will exit the market, this will happen to the point where the losses are zero and all the firms in the market are only breaking even. there will be no loss in the long run.