2. The economists were ultimately interested in whether businesses were affected supply chain disruptions (i.e., inputs becoming more expensive) or by disruptions resulting from demand shocks (people stopped buying some services, stayed home more, etc.).¹ According to the surveyed firms, the researchers found that, as of July 2020, demand shocks, as opposed to supply chain disruptions, were prominent in decisions made by small business firms. The researchers were interested in the decision to close temporarily or completely. They found that, across the sample of surveyed firms: "41.3% of businesses reported that they were temporarily closed because of COVID-19. A far smaller number-1.8%-reported that they were permanently closed because of the pandemic. By contrast, only 1.3% reported that they were temporarily closed for other reasons; 55.5% reported that they were still operational." Let's say many of the small businesses surveyed in July 2020 were local restaurants that said they were temporarily closed. Fixed inputs are the building and equipment to make food; the variable inputs are employees, cook, clean, serve. Assume local restaurants operate in a perfectly competitive industry. All restaurants have the same cost structure. a) Use two diagrams (one for the market for restaurants with supply and demand, and one for a typical restaurant with ATC and MC) to show the market in equilibrium. Why is this an equilibrium? b) Using your diagrams in (a), show how a decrease in demand can lead existing restaurants to decrease the quantity of meals and make an economic loss. Be sure to clearly label the break-even price, cost curves, MR curve, area of economic loss. Will the decrease in demand lead a restaurant to shut down? Briefly explain the economic reason for your answer. c) d) Use one new firm diagram with ATC, MC, and AVC to show when a decrease in demand will not lead a firm to shut down. Be sure to clearly label the diagram, relevant points and areas. e) In the long run, what is the effect of the decrease in demand on the equilibrium price and quantity? Use new market and firm diagrams to defend your answer. f) How does the new equilibrium compare to the old equilibrium in terms of number of

2. The economists were ultimately interested in whether businesses were affected supply chain disruptions (i.e., inputs becoming more expensive) or by disruptions resulting from demand shocks (people stopped buying some services, stayed home more, etc.).¹ According to the surveyed firms, the researchers found that, as of July 2020, demand shocks, as opposed to supply chain disruptions, were prominent in decisions made by small business firms. The researchers were interested in the decision to close temporarily or completely. They found that, across the sample of surveyed firms: "41.3% of businesses reported that they were temporarily closed because of COVID-19. A far smaller number-1.8%-reported that they were permanently closed because of the pandemic. By contrast, only 1.3% reported that they were temporarily closed for other reasons; 55.5% reported that they were still operational." Let's say many of the small businesses surveyed in July 2020 were local restaurants that said they were temporarily closed. Fixed inputs are the building and equipment to make food; the variable inputs are employees, cook, clean, serve. Assume local restaurants operate in a perfectly competitive industry. All restaurants have the same cost structure. a) Use two diagrams (one for the market for restaurants with supply and demand, and one for a typical restaurant with ATC and MC) to show the market in equilibrium. Why is this an equilibrium? b) Using your diagrams in (a), show how a decrease in demand can lead existing restaurants to decrease the quantity of meals and make an economic loss. Be sure to clearly label the break-even price, cost curves, MR curve, area of economic loss. Will the decrease in demand lead a restaurant to shut down? Briefly explain the economic reason for your answer. c) d) Use one new firm diagram with ATC, MC, and AVC to show when a decrease in demand will not lead a firm to shut down. Be sure to clearly label the diagram, relevant points and areas. e) In the long run, what is the effect of the decrease in demand on the equilibrium price and quantity? Use new market and firm diagrams to defend your answer. f) How does the new equilibrium compare to the old equilibrium in terms of number of

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter4: Estimating Demand

Section: Chapter Questions

Problem 6E

See similar textbooks