In Figure 11.8, you saw what happens in the long run when demand rises in a constant

Question:

In Figure 11.8, you saw what happens in the long run when demand rises in a constant cost industry. Let€™s see what happens when demand falls in such an industry: For instance, think about the market for gasoline or pizza in a small city after the city€™s biggest textile mill shuts down. In the figure below, indicate the price and quantity of output at three points in time:
I. In the long run, before demand falls.
II. In the short run, after demand falls.
III. In the long run, after demand falls.

Also, answer the following questions about the market€™s response to this fall in demand.
a. When will the marginal cost of production be lowest: At stage I, II, or III?
b. When firms cut prices, they often do so in dramatic ways. During which stage will the local pizza shops offer €œBuy one, get one free€ offers? During which stage will the local gas station be more likely to offer €œFree car wash with fill-up€?
c. When is P > AC? P d. Restating the previous question: When are profits positive? Negative? Zero?
e. Roughly speaking, will the long-run response mostly involve firms leaving the industry, or will it mostly involve individual firms shrinking? The Firm column of Figure 11.8 should help you with the answer.