A future recession greatly affects the daily market demand for Maine lobsters, which can be described as QD = 3000 + 250I - 250P (I is the average American income in $1000s). Thanks to the recession, that average income falls from $32,000 to $24,000.
All lobster fisherman are identical and face the same relationship between their total daily costs and daily output (q): TC = ½*q2+4q + 200. You should assume that market output is the sum of all firm output (Q = N*q, where N is the number of lobster fishermen). Use this information to answer the following questions.
a) Graph the pre-recession and post-recession demands for lobster. In the short-run, what happens to the price of lobster? (A simple graphical analysis is appropriate, you should not attempt to give a numerical answer)
b) What is the efficient scale (i.e., at what q are average total costs minimized) for lobster fishermen?
c) Before the recession, there were 250 lobster fishermen. Was the industry in long-run equilibrium? Find that scenario's market price, total output, each firm's output, and each firm's profits.
d) After the recession, the 250 lobster fishermen continue to go out and fish.
i) What is each fisherman's profit-maximizing output now?
ii) Find the market price and the total output.
iii) How large of a loss are the fishermen incurring?
iv) In the short-run, will these fishermen continue to operate or shut down (i.e., leave their boats idle at the dock)?
e) Find the long-run equilibrium number of fishermen in the post- recession market for lobsters. How many fishermen had to exit?