Assume that you read the following brief article in the news: On February 26, 1989, the popular TV show “60 Minutes” broadcast a story describing how a cancer-causing chemical named Alar was sprayed on about 15% of all apples grown in the US. The TV show reported that the Alar chemical (also known as daminozide) can cause cancer in the long run. Millions of people watched the TV show, and as a result they stopped eating apples, as there was no way to tell which apples had been sprayed with Alar. Schools removed apple products from school lunches. Sales and prices of apples (and of products containing apples such as applesauce and apple juice) declined significantly. Apple farmers across the country suffered losses. “The amount I make each day is not even enough to pay my apple picking crew and my fuel bill” said one farmer who was interviewed during the crisis; he decided to halt the harvest of his apples. Other farmers continued to harvest, but operated at a loss. Many apple farmers showed a loss for the entire season, pushing them towards bankruptcy as they were having trouble paying off long-term loans that they had taken out to fund their farming businesses.

Analyze the above situation using the tools of market supply and demand and cost analysis. Include supply/demand graphs of the overall market for apples, plus firm-specific demand and firm-specific average cost and marginal cost curves for the individual firms (apple farmers) to illustrate your analysis. Focus your supply/demand and cost analysis on the economic situation that the businesses of individual farmers face, or are likely to face as a consequence of these developments. Assuming the apple market is perfectly competitive, comment on what has happened and what is likely to happen in the future. . Mention short-run shutdown versus operation, and long-run entry and/or exit. Explain any shifts in supply and/or demand. Discuss why some farmers continue to operate while others have stopped.

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