Questions 2, 3, and 4 consider the market for refrigerators in the...

Questions 2, 3, and 4 consider the market for refrigerators in the U.S.

The May 4, 2021 print edition ofThe Wall Street Journalhad a story titled "EPA Eyes Emissions of Cooling Appliances."(You do not have to read this article to understand the setup of questions 2, 3, and 4.) The article reports the EPA is going to ban the use of hydrofluorocarbons in cooling devices such as air conditioners and refrigerators.

Assume, for purposes of Questions 2, 3, and 4, that the refrigerator market is currently a perfectly competitive market with the following conditions:

1) Downward-sloping market demand;

2) Upward-sloping market supply; and

3) U-shaped Average Total Costs and Marginal Costs for individual firms.

Question 2:

For Question 2, you should assume the EPA has not banned the hydrofluorocarbons and the refrigerator industry is initially in Long Run Equilibrium.

Graphically depict (using side-by-side graphs, with the graph on the left showing the market and the graph on the right showing an individual supplier/producer representative of the rest of the firms):

• the perfectly competitive supply and demand curves (S₀andD₀, respectively) and the market price and quantity (P₀andQ₀respectively)
• an individual firm's marginal revenue (MR), marginal cost (MC), average total cost (ATC) curves, the profit maximizing quantity (P0andq0), and profit (₀).If there is no profit, please indicate so on the graph.
• Provide a brief narrative explaining the profitability of an individual firm in an LRE.

Question 3:

Now consider the impact of the ban of hydrofluorocarbons. The ban will force refrigerator manufacturers to retool their factories to use different coolant materials as well as use more expensive equipment from now on. Assume this will represent a permanent increase in Fixed Cost for each refrigerator manufacturer.

• On the same (side-by-side) graph you produced in Question 2, graphically depict any changes in the marketplace and any changes that impact the individual firm.
• Show the movements of the appropriate curve or curves at this new Short Run Equilibrium (SRE).
• Indicate the new market equilibriumP₁andQ₁, the optimal output of an individual firm representative of the other firms in the industry at this SRE (labeled asq₁), and the individual firm's profit, if any (shaded and clearly labeled as₁).
• Provide a brief narrative explaining the movements and the resulting change in an individual firm's profit, if any. Please make sure you address the changes in the market equilibrium quantityQ, market priceP, and the individual firm's profit maximizing quantityq, if any.

Question 4:

Continuing your analysis of equilibrium in the refrigerator industry under the elimination of hydrofluorocarbons, you will now explain what happens in the industry as it transitions from the short-run equilibrium (SRE) in Question 3 to the new long-run equilibrium (LRE).

• Building on the side-by-side graph you've created in Question 2 and updated in Question 3, please show the movements of all applicable curves (both in the market and for an individual firm) using a subscript of 2 for such curve labels as the market adjusts to a new LRE.
• Indicate the new LRE equilibrium asP₂andQ₂, the optimal output of an individual firm representative of the other firms in the industry at this LRE (labeled asq₂), and the individual firm's profit, if any (shaded and clearly labeled as₂). If there's no profit, indicate that₂is equal to zero on the graph.
• In a brief narrative, describe what will happen to this industry as it moves from the Short Run Equilibrium (SRE) to the eventual Long Run Equilibrium (LRE).