In a particular market, the long-run equilibrium price for a product is $100. Market analysts have determined that after a price deviation, the price in the next period adjusts to close half the gap between the previous period's price and the equilibrium price. For example, if the price were $110, the gap is $10, so the price would fall by $5 to $105 in the next period.
Suppose a temporary supply disruption causes the price to jump to $140. Based on the described adjustment process, what will the price be in the subsequent period, and what does this indicate about the market's equilibrium?
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In a particular market, the long-run equilibrium price for a product is $100. Market analysts have determined that after a price deviation, the price in the next period adjusts to close half the gap between the previous period's price and the equilibrium price. For example, if the price were $110, the gap is $10, so the price would fall by $5 to $105 in the next period.
Suppose a temporary supply disruption causes the price to jump to $140. Based on the described adjustment process, what will the price be in the subsequent period, and what does this indicate about the market's equilibrium?