Question

Then, suppose a new hormone shot is developed at Texas A&M University that allows all ranchers to cut their feed costs by 27 percent if they use this shot.

Graphically illustrate the long-run implications of this development in the ranching industry using a new set of side-by-side industry and firm graphs.

Answer 1

Market begins with ,long run equilibrium where price is P0 and each firm is supplying q0. The new technology reduces the cost of production so that existing firms can produce more. This shifts the relevent costs curve down. The new MC and old price line P0 induces firm to increase production so each firm is earning a profit at P1 and q1 combination.

In the short run they will produce a higher quantity at an unchanged price which is P0. During the transtion from short to long run, new firms will enter the industry to earn profits and this will gradually shift the supply curve rightwards. Market will eventually settle down at a new price of P1 where entry is stopped due to no further economic profits. In the long run the costs are reduced permanently and production is increased.