1.3. In Figure 11.6, you saw what happens in the long run when demand rises in a constant cost industry. Let's see what happens when demand falls in such an industry: For instance, think about the market for gasoline or pizza in a small city after the city's biggest textile mill Costs and Profit Maximization Under Competition • CHAPTER 11 • 213 shuts down. In the figure below, indicate the price and quantity of output at three point in time:

I.

In the long run, before demand falls II. In the short run, after demand falls III. In the long run, after demand falls Price Short-run supply Quantity Also, answer the following questions about the market's response to this fall in demand.

a. When will the marginal cost of production be lowest: At stage I, II, or III?

b. When firms cut prices, they often do so in dramatic ways. During which stage will the local pizza shops offer "Buy one, get one free" offers? During which stage will the local gas station be more likely to offer

"Free car wash with fill-up?"

c. When is P > AC? P < AC? P = AC?

d. Restating the previous question: When are profits positive? Negative? Zero?

e. Roughly speaking, will the long-run response mostly involve firms leaving the industry, or will it mostly involve individual firms shrinking? The "firm" column of Figure 11.6 should help you with the answer.