Question

Assume a perfectly competitive industry making peanuts is in long-run equilibrium. The price per pound of peanuts is $2. Next, assume that the demand for peanuts increases in the short run, and the price rises to $4 per pound. If this is a constant cost industry, what price per pound should we expect in the long-run

Answer 1

In a perfectly competitive constant cost industry, we expect the price to return to the original level of $2 per pound in the long run after a short-run increase due to new firms entering the market and increasing supply.

Step-by-step explanation:

The subject question pertains to a scenario in a perfectly competitive industry, specifically the market for peanuts, and involves analyzing the outcomes of a change in market conditions. When the demand for peanuts increases leading to a short-run price increase from $2 to $4 in a perfectly competitive constant cost industry, in the long run, we would expect the price to return to $2 per pound. This is because the rise in price would temporarily generate economic profits for existing firms, which would attract new firms into the industry. The entry of new firms would increase the supply of peanuts, ultimately returning the industry to a long-run equilibrium where firms earn zero economic profits (P = AC) at the original price level.

Answer 2

The price of the item in long run equilibrium will be the same i.e $ 2 per unit

Step-by-step explanation:

Given

The equilibrium price in the long run = $ 2 per unit

The price of the item in long run equilibrium will be the same i.e $ 2 per unit

The increase of price in short run will not have much impact on the Average variable cost and hence in long run the price will remain constant.