Question

Milkcity is famous for its many milkshake stands. Due to Pomonavirus, the government orders that the milkshake stands can only operate at 40% dine-in capacity, but can continue to deliver shakes, though Pomonavirus has meant less milkshake is demanded in Milkcity.

Questions:

1) How has consumer's optimal decision-making process changed because of Pomonavirus?

2) Does supply change? If so, how does the firm's optimal decision-making process change?

2.1) Did the firm's production function change?

2.2) Does the firm's cost structure change?

3) What about Q1 and Q2 in the long run?

Answer 1

Due to promonavirus there is a decline in demand for a milkshake. above to that, there is a restriction from the government side to operate 40% of the dining capacity.

a) so the consumer's optimal decision making process decline with the fear of Promonavirus. so the quantity demanded has declined. the new demand curve is AD1 and the new equilibrium quantity is Q1 and price also decrease to P1 the logic behind this price decline is as it is a perishable good so the seller can't keep the product for a long time in stock so they want to sell it out with a comparatively low price.

b) looking at the demand, the supply can not be changed immediately but yes there is a slow change in supply also. so the new supply curve is AS1 and both intersect at a new point E1. the instant changes happen when there is a change in supply, the price came back to the original position P* and quantity Q2.

c) yes there is a change in production function for the milkshake firm the price level is P* and quantity Q2.

d) As the product circulation is less but the fixed cost is the same definitely the cost structure changed with a minimum level of profit.

d) In the long run, if the situation continues in the future then this temporary cost structure will be permanent with the same price and quantity and the quantity demanded will be Q2 with price P*.

If in future the restriction will be taken up then the quantity demanded will be back to Q1 with price P*.

NOTE: consider the point of exaplation before putting thumb down.