New Zealand possums produce the highest quality fur, due to the large pelts per body size. Demand for New Zealand possums products has risen dramatically. This is partly a result of the conservation benefits of harvesting New Zealand 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 long-run industry supply if the price of possum fur increased as possum culling increased their production of possum furs? Use a graph to demonstrate the validity of your prediction.
a. (See panel a below.) Demand will increase, the quantity exchanged in the market will increasefrom Q0 to Q1, and market price will rise from P0 to P1. b. (See panel b below.) The market price…