Answer To Question:

The outbreak of aflatoxin that makes it impossible to produce any peanut butter in this competitive industry will cause a total loss of 6,000 in producer and consumer surplus. The consumer surplus will be 4,000 and the producer surplus will be 2,000. This is calculated by finding the industry supply given by P = 4 + Q/1,000, and then finding the equilibrium Q which is 2,000. The consumer surplus is the area of the upper triangle, which is (10 − 6) x 2,000/2 = 4,000 and the producer surplus is the area of the lower triangle, which is (6 − 4) x 2,000/2 = 2,000.

Short Run Marginal Cost Curve:

The Short Run Marginal Cost (SMC) curve for each of the 1,000 identical firms in the competitive peanut butter industry is given by SMC = 4 + Q.

Demand Curve:

The demand curve for this industry is P = 10 – 2Q/1,000.

Equilibrium Price and Quantity:

The equilibrium price and quantity of the industry can be found using the short-run marginal cost and demand curve. The industry supply is given by P = 4 +Q/1,000. The equilibrium Q is then found by solving the equation 3Q/1,000 = 6, giving Q = 2,000, and P = 6.

Consumer and Producer Surplus:

The consumer surplus is the area of the upper triangle, which is (10 − 6) x 2,000/2 = 4,000. The producer surplus is the area of the lower triangle, which is (6 − 4) x 2,000/2 = 2,000.

Total Loss in Surplus:

The total loss in producer and consumer surplus due to the outbreak of aflatoxin is 6,000. The consumer surplus is 4,000 and the producer surplus is 2,000.

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