a.If we consider the coffee industry as a competitive industry.

1.In the long run, how equilibrium in this industry is established? You may illustrate your answer with the use of graphs showing both demand and supply for coffee.Now suppose that increase in coco prices induce increase in the demand for coffee. Using your graph to show what happens in the short run to the coffee market and to each existing coffee producers.

2.If we assume that the demand for coffee remains high, what will happen to the price overtime? Would the long run equilibrium price be above, below, or equal to the short run equilibrium price? Is it possible for the new long-run equilibrium price to be above the original long run equilibrium price? Explain. (6 marks)

b.Suppose that a firm in a perfectly competitive industry finds that at its current output rate, marginal revenue exceeds the minimum average total cost of producing output. Furthermore, the firm is producing an output rate at which marginal cost is less than the average total cost at the rate of output. Is this firm maximizing its economic profits? Why and why not?(6 marks)