Final answer:
In the short run, an increase in variable costs for firms in a perfectly competitive market results in a decrease in output. The typical firm will adjust its output to where the new P = MR = MC equilibrium is at a lower quantity. In the long run, persistent cost increases could lead to firm exits and restoration of the zero economic profit equilibrium.
Step-by-step explanation:
In a perfectly competitive market that is in long-run equilibrium, firms are earning zero economic profits with businesses producing at the output level where price (P) equals marginal revenue (MR), marginal cost (MC), and average cost (AC). When faced with an increase in variable costs in the short run, the typical firm's MC curve will shift upwards, which causes the new P = MR = MC equilibrium point to be at a lower quantity of output. Therefore, the output of a typical firm will decrease as a result of the increased variable costs.
It is important to note that, in the short run, firms may continue producing as long as they can cover their average variable costs despite making economic losses. However, if the price falls below their average variable cost, firms will shut down and produce zero output as they cannot cover their variable costs.