2. Assume that the egg industry is perfectly competitive and is in long-run equilibrium with a perfectly elastic long-run industry supply curve. Health concerns about cholesterol then lead to a decrease in demand. Construct a figure similar to Figure 7-7, showing the short-run behavior of the industry and how long-run equilibrium is reestablished.
In the following diagram, point XMKT in panel (b), the intersection of S1 and D1, represents the long-run industry equilibrium before the change in consumer tastes. When tastes change, demand falls and the industry moves in the short run to point YMKT in panel (b), at the intersection of the new demand curve D2 and S1, the short-run supply curve representing the same number of egg producers as in the original equilibrium at point XMKT. As the market price falls, an individual firm reacts by producing less—as shown in panel (a)—as long as the market price remains above the minimum average variable cost. If market price falls below minimum average variable cost, the firm would shut down immediately. At point YMKT the price of eggs is below minimum average total cost, creating losses for producers. This leads some firms to exit, which shifts the short-run industry supply curve leftward to S2. A new long-run equilibrium is established at point ZMKT. As this occurs, the market price rises again, and, as shown in panel (c), each remaining producer reacts by increasing output (here, from point Y to point Z). All remaining producers again make zero profits. The decrease in the quantity of eggs supplied in the industry comes entirely from the exit of some producers from the industry. The long-run industry supply curve is the curve labeled LRS in panel (b).