Consider a market with a downward-sloping demand curve. Assume that all firms in a competitive market are initially in a long-run and short-run equilibrium. Suppose the variable costs of production increase, which shifts up the marginal cost and average total cost curves to the same extent. In the long run we would expect the price to _________ and the number of firms in the market to ___________.Group of answer choicesincrease; decreaseincrease; increasedecrease; decreasedecrease; increaseNone of the above
Question
Consider a market with a downward-sloping demand curve. Assume that all firms in a competitive market are initially in a long-run and short-run equilibrium. Suppose the variable costs of production increase, which shifts up the marginal cost and average total cost curves to the same extent. In the long run we would expect the price to _________ and the number of firms in the market to ___________.Group of answer choicesincrease; decreaseincrease; increasedecrease; decreasedecrease; increaseNone of the above
Solution
The correct answer is: increase; decrease.
Here's why:
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An increase in variable costs of production shifts the marginal cost and average total cost curves upward. This means that it costs more for firms to produce each unit of output.
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In the short run, firms may not be able to adjust their production levels, so they may continue to produce at a loss. However, in the long run, firms can adjust their production levels or exit the market entirely.
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As some firms exit the market due to the increased costs, the supply in the market decreases. This decrease in supply, along with a downward-sloping demand curve, leads to an increase in the equilibrium price.
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The increase in price may not be enough to cover the increased costs for all firms, so the number of firms in the market decreases in the long run.
So, in the long run, we would expect the price to increase and the number of firms in the market to decrease.
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