Question

Suppose the market for gourmet chocolate is in long-run equilibrium, and an economic downturn has reduced consumer discretionary incomes. Assume chocolate is a normal good, and the chocolate producers have identical cost structures. a. Demand will . b. Profits for chocolate producers in the short run will . c. Chocolate producers will the market. d. The long-run supply curve will .

Answer 1

Answer:

a. Decrease

b. Decline

c. Exit

d. No change

Explanation:

The market for gourmet chocolate is in the long-run equilibrium, and an economic downturn has caused the consumer disposable income to fall. Chocolate is a normal good, and the chocolate producers have identical cost structures.

a. This decline in the consumer income will reduce the purchasing power of the consumers. As a result, the demand will decrease. The demand curve will move to the left.

b. This leftward shift in the demand curve will cause the price to decline, As the price falls, the profits earned by the producers will decline as well.

c. In the long run, the firms operate at zero economic profits. So a decline in profits imply that the firms are operating at an economic loss. This will cause the loss incurring firms to exit the market.

d. The long run supply curve will remain the same. It is not affected by change in profits, it changes only with change in the state of technology or availability of resources.