1. Consider the competitive market for natural gas. Now suppose that the price of renewable energy (a substitute for natural gas) decreases because of a technological advance. Answer the following questions about the natural gas market.
a. Draw two graphs, side by side, illustrating the short-run effects of the fall in renewable energy prices on the natural gas market and an individual natural gas firm’s output and profit. Use a graph with a ‘typical’ set of average total cost (ATC) and marginal cost (MC) curves.
b. Briefly explain the long-run effects of the fall in renewable energy prices on the natural gas market by using a graph (or graphs) to show the likely effects on the profits of natural gas firms, and the market price and market quantity of natural gas.