Final answer:
When demand declines in a perfectly competitive, increasing-cost industry, firms will exit, leading to an initial decrease in price followed by an eventual rise towards the zero-profit equilibrium. Output will also decline as fewer firms remain in the industry.
Step-by-step explanation:
If a perfectly competitive, increasing-cost industry is in long-run equilibrium and a decline in demand occurs, firms will begin to incur economic losses. This will result in some firms leaving the industry, reducing the market supply and causing the industry price to fall initially. However, as firms exit, the market supply curve shifts to the left, which will lead to an eventual increase in the industry price as the market moves towards a new equilibrium. Ultimately, the output will decrease since there are fewer firms in the market producing goods. Therefore, the correct answer is that firms will leave the industry, and both the price and output will ultimately decline.
The long-run market equilibrium ensures that remaining firms in the perfectly competitive market will reach a point where they earn zero economic profits, operating where P = MR = MC, which coincides with the minimum of the average cost (AC) curve. In the context of an increasing-cost industry, as firms exit, the costs of production no longer increase due to reduced demand, aligning with the new market equilibrium.