Assume that competitive firms in a competitive market are in long-run equilibrium. What will happen in the long run in that same constant cost industry? Prices will ______________ and the market output will ______________ when compared to the levels prior to the increase in demand.Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.ahave increased; have increasedbremain the same; remain the samechave increased; remain the samedremain the same; have increased
Question
Assume that competitive firms in a competitive market are in long-run equilibrium. What will happen in the long run in that same constant cost industry? Prices will ______________ and the market output will ______________ when compared to the levels prior to the increase in demand.Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.ahave increased; have increasedbremain the same; remain the samechave increased; remain the samedremain the same; have increased
Solution
The correct answer is d) remain the same; have increased.
Here's why:
In a competitive market, firms are price takers and they adjust their output level such that the market price equals the minimum point of their long-run average cost curve. This is the point of long-run equilibrium.
When there is an increase in demand, in the short run, prices will rise and firms will increase their output. This will lead to higher profits for existing firms.
Seeing these higher profits, new firms will enter the market, which increases the market supply. As the market supply increases, the price will fall back to the minimum point of the long-run average cost curve, which is the point of long-run equilibrium.
However, because there are now more firms in the market, the total market output will be higher than before.
So, in the long run, in a constant cost industry, prices will remain the same, but the market output will have increased.
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