Question

1. [6 points] About a year ago, the mask mandates across were Canada were removed. In other words,

people weren't required by the law to wear masks in public places like restaurants and shopping malls.
Assuming the market for (regular/typical) masks is perfectly competitive and that the market was in a long-
run equilibrium before the mask mandates were removed, answer the following questions.
(a) Draw a well labeled diagram showing a typical mask producing firm's output and profit in the long-run
equilibrium.
(b) After the mask mandates are removed, what happens in the market for masks and how is a typical mask
producing firm affected in the short-run? Explain briefly with the help of an appropriate diagram(s).
(c) On the basis of the perfect competition model you studied, discuss how the short-run impacts of
removing the mask mandates on the market and firms differ from the long-run impacts.

Answer 1

In a perfectly competitive market, firms produce where P = MR = MC and P = AC, earning zero economic profits in long-run equilibrium. After mask mandates were removed, demand fell, and firms faced short-run losses, some shutting down to minimize losses, while others continued producing at a loss. Firms exit the market in the long run, returning the market price to the zero-profit equilibrium.

Step-by-step explanation:

Long-Run Equilibrium of a Perfectly Competitive Firm

A perfectly competitive firm in long-run equilibrium will produce at the output level where P = MR = MC (price equals marginal revenue and marginal cost) and P = AC (price equals average cost), resulting in zero economic profits. This is illustrated by a point where the firm's marginal cost curve crosses its average cost curve at the level of the market price.

Short-Run Effects of Removing Mask Mandates

When mask mandates are removed, the demand for masks falls, causing the market price to decrease. In the short run, a typical mask producing firm will face a price below its average cost curve, leading to economic losses. Firms will produce where new P = MR = MC, provided they can cover their average variable costs. Otherwise, they may shut down to minimize losses. A corresponding diagram would show the market supply curve shifting left and the firm's output level moving to where new P intersects the MR = MC line, below the AC curve.

Short-Run versus Long-Run Adjustments

In the short run, firms may incur losses but will continue producing as long as they cover average variable costs. However, in the long run, firms facing persistent economic losses will exit the market, which reduces supply and increases the price back up to the zero-profit level. This market adjustment process ensures that in the long run, firms will either earn zero economic profits or exit the market.

Answer 2

Answer: A

Step-by-step explanation: