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 once all of the adjustments to long-run equilibrium have been made, the price of candy canes will equal: a) $0.05. b) $0.10. c) $0.15. d) the question is impossible to answer without knowing exactly how many firms entered and/or left the industry.

Answer 1

After a $0.05 increase in production cost due to higher sugar prices, the new long-run equilibrium price for candy canes in a perfectly competitive market will be $0.15. This new price allows firms to cover the increased costs and continue making a normal profit.

Step-by-step explanation:

Considering the scenario where the market for candy canes is in perfect competition and is affected by a rise in the price of sugar, leading to an increased marginal and average total cost of production by $0.05, the new long-run equilibrium price can be deduced. Initially, if the market was in long-run equilibrium with candy canes priced at $0.10, firms were likely covering their average total cost, which includes a normal profit. With the increased cost of production, the firms would be unable to continue selling at $0.10 without incurring losses.

In the long run, perfectly competitive markets will adjust to ensure that all firms are able to make a normal profit. This means that the firms will increase their prices to cover the new higher costs. Consequently, once the market has adjusted back to long-run equilibrium, each candy cane will cost $0.15 (initial price $0.10 + increased cost $0.05). This accounts for the new average total cost which now includes the rise in the cost of sugar.

The assumption here is that firms will adjust their prices upwards to cover costs and that the market will allow for this due to the change being a cost-push factor affecting all competitors equally. Thus, we can conclude that the new long-run equilibrium price for candy canes following the increase in sugar prices will be $0.15.