Question

Suppose that the tofu industry is initially operating in long-run equilibrium at a price level of $5 per block of tofu and quantity of 75 million blocks per year. suppose that the food and drug administration (fda) reports that compounds naturally occurring in tofu are linked to chronic illness.

The FDA's research is expected to cause consumers to demand ___ tofu at every price. In the short run, firms will respond by ___
- entering the industry
- producing more tofu and earning positive profit
- producing less tofu and runing at a loss
- exiting the industry
- producing the same amount of tofu and earning positive profit
- producing the same amount of tofu and runing at a loss

Answer 1

Upon FDA reports linking tofu to chronic illness, demand for tofu will decrease, prompting firms to reduce production and potentially incur losses. Some firms may shut down or exit the industry, resulting in a leftward shift of the supply curve until the market reaches a new long-run equilibrium with no profits or losses. Therefore the correct answer is - producing less tofu and runing at a loss.

Step-by-step explanation:

If the Food and Drug Administration (FDA) reports that compounds naturally occurring in tofu are linked to chronic illness, consumers are expected to demand less tofu at every price. In response to decreased demand, in the short run, firms will likely produce less tofu and could run at a loss. As the market price begins to fall below firms' average costs, some firms will continue to produce to cover their average variable costs, while others that cannot cover these costs may shut down immediately to minimize losses. Eventually, many firms may exit the industry, causing the market supply curve to shift to the left. The price can then start to rise again as the supply diminishes, and this process will continue until the remaining firms are no longer making losses and reach the zero-profit level of long-run equilibrium.