The cashew industry is perfectly competitive and until now each of the identical firms in the industry have been earning zero economic profits while selling ay units of output each (for a combined industry-wide total of qy units) at a market equilibrium price of P1 per unit. An unexpected increase in the demand for cashews raises the market equilibrium price to P2, which creates a situation in which P2 exceeds MC at 91 units of output. a. If the firms continued producing 91 units each, would their combined output of cashews be too little, too much, or just right to achieve allocative efficiency? O Just right Too much Too little b. In the long run, what will happen to the supply of cashews and the price of cashews? The industry's supply of cashews will exceed Q1 and the price of cashews will equal P1. The industry's supply of cashews will be less than Q1 and the price of cashews will be less than P1. The industry's supply of cashews will equal Q1 and the price of cashews will equal P2. The industry's supply of cashews will exceed Q1 and the price of cashews will equal P2. c. Use a supply-and-demand diagram to show how that response will change the combined amount of consumer surplus and producer surplus in the market for cashews. Instructions: Use the tool Surplus' to identify the initial surplus in the graph on the left, which illustrates the initial situation before demand increases in the cashew market. Click on 'Surplus' and then click anywhere on the graph. Click and drag the endpoints of the triangle to show the total of consumer surplus and producer surplus at the original price and quantity. Next, use the tool 'Surplus2' in the graph on the right to identify the long-run surplus after the changes in market demand and supply. Use the same process as before to show the total of consumer surplus and producer surplus in long-run equilibrium. $120 $120 $100 o' $100 s , $ $80 Price Price $60 D 20 60 80 100 120 20 40 60 80 Quantity Quantity
