Suppose that purely competitive firms producing cashews discover that P exceeds MC.

a. Is their combined output of cashews too little, too much, or just right to achieve allocative efficiency?

(Click to select) Too little or Just right or Too much.

b. In the long run, what will happen to the supply of cashews and the price of cashews?

1.	Supply will increase and the price of cashews will increase.
2.	Supply will increase and the price of cashews will decrease.
3.	Supply will decrease and the price of cashews will decrease.
4.	Supply will decrease and the price of cashews will increase.

c. Use a supply and demand diagram to show how that response will change the combined amount of consumer surplus and producer surplus in the market for cashews.

Instructions: Given the initial equilibrium price P₁ and quantity Q₁, (1) use the shader tool provided 'Initial' to identify the initial surplus. This will place a triangle on the graph. Click and drag the endpoints of the triangle to show consumer surplus and producer surplus at the original price and quantity. (2) Click and drag the supply curve to show how the market reacts to the P > MC condition. (3) Click and drag the initial equilibrium point to the new equilibrium point. (4) Use the shader tool provided 'Final' to identify the resulting consumer surplus and producer surplus.

Transcribed Image Text:

Price P Q₁ Quantity reset S₁ 1 D Initial Final Price P Q₁ Quantity reset S₁ 1 D Initial Final