Question

Questions 2, 3, and 4 ask you to consider the situation described in the article published in Monday, March 2, 2020 issue of The Wall Street Journal and titled “Meat Stockpiles Surge as Coronavirus Epidemic Curbs Exports”. You do not have to read the story to understand the setup of these questions. Here is what you should focus on to complete your analysis.  

• In 2019, U.S. meatpackers had been exporting large amounts of meat (chicken, pork, and beef) to China.
• However, the coronavirus (Covid-19) outbreak in January and February 2020 has significantly reduced demand for U.S. meat exports.
• For this analysis, assume the meatpacking industry is perfectly competitive, demand is downward sloping, supply is upward sloping, and production technology results in traditional U-shaped ATCand AVC curves.
• Finally, for questions 2, 3, and 4, market price is always greater than the minimum of the AVC curve.

Question 2:

Assume that prior to the outbreak of the coronavirus (Covid-19), the meatpacking industry was in Long Run Equilibrium (LRE).

• Using our side-by-side graph methodology, graphically depict the market equilibrium P₀ and Q₀, the optimal output of an individual firm representative of the other firms in the industry at this LRE (labeled as q₀), and the individual firm’s profit if any (shaded and clearly labeled).
• Provide a brief narrative explaining the setting and the profitability of an individual firm in an LRE (including why there is a certain level of profit in this setting).
• Reminder: Be sure to label all relevant points and axes.

Answer 1

Market situation( perfectly competitive) before the outbreak of Covid-19-----

Initially before corona vires outbreak , the meat industry in 2019 was undergoing Equilibrium Quantity and price as per the market forces of demand and supply .The Equilibrium price and quantity help US exporters( individual firms) to take decisions regarding( price and quantity)export to china.

The graph shows, first diagram, of meat Industry, in which demand curve ( negetively sloped) and supply curve ( positive slope) intersect each other at point E. Thr price corresponding to this equilibrium at vertical axis is OP,while Equilibrium quantity along x - axis is Oq

Diagram (2), shows the price charged by individual firms as determined by meat exporting Industry ( as under perfect competition,each firm is price taker).MC curve cuts LAC & AVC curves from minimum points.

The quantity to be exported by firm is determined where MC= MR.The Equilibrium point E ,makes Oq quantity.

As ,the firm is a Competitive firm, it earns just normal profits as at Equilibrium point -----

LAC=AR=MC=MR

Market situation after outbreak of Covid-19-----

In 2020, when the threat of corona virus has spread all over the world, the demand for packed meat has decreased.The export to china has reduced so the industry demand curve will shift leftward.

In the diagram-----(3), we see that new Equilibrium Point h(E¹)emerged with the intersection of supply and new demand curve ( D¹).

Now the new price ( p¹) is less than the initial equilibrium point while the Quantity ( q¹) is also less than the initial equilibrium Quantity (q).

In the diagram (4), we see impact of reduced price on individual firm.Now ,the firm is incurring loss as sAC( short term average cost)curve is above AR( price) curve . The area ABCD depicts loss to an individual fir post corona virus threat.