3. Suppose that tea and coffee are close substitutes, and sharply lower coffee prices lead to a...
Question:
3. Suppose that tea and coffee are close substitutes, and sharply lower coffee prices lead to a decrease in demand for tea. As tea prices decrease, tea producers experience short-run economic losses. If the tea industry is a price-taker industry and if sufficient time is allowed for the market to adjust fully to the decrease in demand for tea, then compared to the short-run, one would expect the tea industry's output, prices and losses, in the long-run to:
a. increase, increase, and stay the same.
b. decrease, increase, and stay the same.
c. decrease, decrease, and disappear.
d. increase, decrease and disappear.
e. decrease, increase and disappear.
4. If firms in the small-boat industry are initially in long-run equilibrium, what will be thelong-runeffect on profits and boat prices of an increase in the demand for small boats? (Assume boat manufacturers are price takers and that increases in industry output raise resource prices.)
a. Both profits and boat prices will return to their original levels.
b. Profits will be higher, but prices will return to their previous level.
c. Profits will return to their original level, but prices will be higher.
d. Both profits and prices will be higher in the long run.
e. Profits will return to their original level, but prices will be lower.