Question

In the diagram below, S⁰ and D⁰ are the supply and demand for hand sanitizer before the onset of COVID-19. The onset of COVID-19 caused the demand for hand sanitizer to shift out to D¹. In the short run, supply is fixed at level Q⁰, and in the long run the supply schedule rotates down to S¹. Assume S⁰ is given by Q^S = -1.5 + 0.25P and D⁰ is given by Q^D = 4.5 - 0.5P. Further assume that S¹ is given by Q^S = -3 + 0.5P and D¹ is given by Q^D = 6 - 0.5P.

With Policy A, retailers with short run supply Q⁰ are allowed to raise their price to level P¹ in response to the shift in demand. With Policy B, price gouging is not allowed, and thus retailers with short run supply Q⁰ are forced to maintain their price at level P⁰ after the shift in demand. With policy A, price increases by ______ dollars per unit. (Input a number, such as "56", with no dollar sign or quotation marks.)

Refer to the previous question regarding hand sanitizer.

1. Calculate the value of consumers’ willingness to pay for the short run supply (i.e., Q⁰ units) of sanitizer. You must show the main steps in your solution to receive full credit. (Tell us what you are doing.)
2. Identify two reasons why the supply curve may pivot down from S⁰ to S¹ in the long run. For each reason that you list, indicate which policy (A or B) will typically cause the largest downward pivot in the supply curve. Briefly explain your reasoning. Organize your answer as follows:
   
   Reasons for downward pivot in supply curve:
   (i)
   (ii)
   
   For reason (i), Policy ____ (choose A or B) will cause the largest downward pivot because....
   
   For reason (ii), Policy ____ (choose A or B) will cause the largest downward pivot because....

Answer 1

Following are the reason for downward pivot in supply curve in long run:-

(1) In long run resources can be acquired, to produce more amount of sanitizer, resources such as new set up, more chemical, technological advancement etc., which leads productivity.

(2) Due to scale of economies, production cost will decrease, which lead to increment in supply to maximize profit.

For reason (1) Policy B will cause the largets downward pivot because as per this policy, firm can't increase price however still they maximize their profit in long run by long term production.

For reason (2) Policy A will cause the largest downward pivot because as per this policy firm has option to increase price to meet its current demand on the other hand due to scale of economies they can maximize firm's profit.

Can't write answer A, as it says to refer to previous question , which is not given here.