Assume that competitive firms in a competitive market are in long-run equilibrium. Assume a constant cost industry. In the short-run, an increase in demand will cause firm output to ______________ and the market price to ______________.Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.aincrease; increasebremain the same; increasecremain the same; remain the samedincrease; remain the same
Question
Assume that competitive firms in a competitive market are in long-run equilibrium. Assume a constant cost industry. In the short-run, an increase in demand will cause firm output to ______________ and the market price to ______________.Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.aincrease; increasebremain the same; increasecremain the same; remain the samedincrease; remain the same
Solution
In the short-run, an increase in demand will cause firm output to increase and the market price to increase. So, the correct answer is a) increase; increase.
Here's why:
In the short run, firms cannot change their plant size or scale of operations. So, when demand increases, firms respond by increasing their output to meet the higher demand. This is done by increasing the usage of variable inputs like labor and raw materials.
As firms increase their output, the increased demand for inputs can cause their prices to rise. Firms pass on this cost to consumers in the form of higher prices. Hence, the market price increases.
Remember, this is a short-run phenomenon. In the long run, new firms will enter the market, attracted by the higher prices. This will increase the supply, bringing down the market price to the original equilibrium level.
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