Consider the perfectly competitive barley industry. It is initially in long-run equilibrium at quantity Q0 and price p0.
a. Draw a supply-and-demand diagram for the barley market, showing the initial long-run equilibrium.
b. Draw a diagram for a typical firm when the industry is in its initial long-run equilibrium, showing its MC, ATC, and LRAC curves. Are any profits being earned by the typical barley farmer?
c. Now suppose there is an increase in demand (caused by an increase in demand for beer, which uses barley as an input). Price for barley rises to p1. In your diagram, show the typical firm's short-run response to the increase in market price from p0 to p1. Show the area that represents the typical firm's profits at this new price.
d. Explain how this industry adjusts to its new long-run equilibrium. Illustrate this adjustment both in the demand-and-supply diagram and in the diagram of the typical firm. (You may assume that the cost curves for barley firms are unaffected by this change.)