Reference no: EM132336510

Question

Canada possums produce the highest quality fur, due to the large pelts per body size. Demand for Canada possum products has risen dramatically. This is partly a result of the conservation benefits of harvesting Canada possums. This has made the product seem more environment-friendly than other fur products and boosted sales to concerned consumers.

Assume that the possums market satisfies all of the attributes of a competitive market. Further assume that high grade possum furs are the most expensive input into the possum fur production function.

a. Use a graph of the market for possum fur to demonstrate the effect of its environmentally friendly status on the market equilibrium.

b. Graph the reaction of an individual incumbent firm to the increase in market demand. In your graph, identify the firm's revenue and cost structures.

c. What would you predict would happen to the long-run industry supply, if the cost of possum fur raises when the production of possum furs increases? Use a graph to explain.