Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, and that the price of each candy cane is $0.10. Now suppose that the price of sugar rises, increasing the marginal and average total cost of producing candy canes by $0.05; there are no other changes in production costs. Based on the information given, we can conclude that once all the adjustments to long-run equilibrium are achieved, the price of candy canes will equal:

Question

Quizplus · Accepted Answer

When the price of sugar rises, the marginal and average total cost of producing candy canes increases by $0.05. This means that the candy cane producers will experience economic losses in the short run and some firms will exit the industry. As a result, the market supply curve will shift to the left, leading to a shortage of candy canes at the original price of $0.10. This shortage will cause the price of candy canes to rise. The price will continue to rise until it reaches the point where economic profits are zero, which is at the new equilibrium price of $0.15. Therefore, the price of candy canes will increase to fifteen cents once all the adjustments to long-run equilibrium are achieved.

Suppose That the Market for Candy Canes Operates Under Conditions