Question
Questions 1, 2, 3, and 4 ask you to consider the general impact of the Covid-19 pandemic on the supply of natural gas as well
Questions 1, 2, 3, and 4 ask you to consider the general impact of the Covid-19 pandemic on the supply of natural gas as well as the situation described in the article published in Monday, December 6, 2021 issue of The Wall Street Journal and titled "Balmy Forecasts Send Natural Gas Prices Plunging". You do not have to read the story to understand the setup of these questions. Please carefully read each question to understand when these changes are introduced into the initial scenario. Here is what you should focus on to complete your analysis.
- For this analysis, assume the natural gas industry is perfectly competitive, demand is downward sloping, supply is upward sloping, and production technology results in traditional U-shaped ATC and AVC curves.
- Finally, for questions 1, 2, 3, and 4, market price is always greater than the minimum of the AVC curve.
You will be using the same graph in Questions 1, 2, and 3, with each question asking you to add new elements to the graph as part of your analysis. While a graph is optional in Question 4, you may continue using this graph for Question 4 as well.
QUESTION
Assume that prior to the outbreak of the coronavirus (Covid-19), the natural gas industry was in Long Run Equilibrium (LRE).
- Using our side-by-side graph methodology (with market on the left and individual firm on the right), graphically depict the market equilibrium P0 and Q0, the optimal output of an individual firm representative of the other firms in the industry at this LRE (labeled as q0), and the individual firm's profit if any (shaded and clearly labeled).
- Provide a brief narrative explaining the setting and the profitability of an individual firm in an LRE (including why there is a certain level of profit in this setting).
- Reminder: Be sure to label all relevant points and axes.
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