Question

Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, and that the price of each candy cane is $0.10. Now suppose that the price of sugar rises, increasing the marginal and average total cost of producing candy canes by $0.05; there are no other changes in production costs. Based on the information given, we can conclude that in the long run we will observe:

Answer 1

The price of candy canes, in the long run, will be $0.15.

Explanation:

The price of the candy cane is $0.10.

The firm is in the long-run equilibrium so the price will be equal to marginal cost and average total cost.

Now, with the increase in sugar prices, the ATC will increase to $0.15.

This will cause losses to some of the firms.

In the long run, the loss incurring firms will exit the market. As a result, the market supply will decline. This consequently leads to an increase in the price to $0.15 where ATC is being covered.

Answer:

The price of candy canes, in the long run, will be $0.15.

Explanation:

The price of the candy cane is $0.10.

The firm is in the long-run equilibrium so the price will be equal to marginal cost and average total cost.

Now, with the increase in sugar prices, the ATC will increase to $0.15.

This will cause losses to some of the firms.

In the long run, the loss incurring firms will exit the market. As a result, the market supply will decline. This consequently leads to an increase in the price to $0.15 where ATC is being covered.

In the long-run equilibrium price will be equal to ATC. So, the price of candy canes will be $0.15.