Question

Assume that competitive firms and 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.

A.Have increased; have increased
B.Remain the same; remain the same
C.Have increased; remain the same
D.Remain the same; have increased

Answer 1

In a constant cost industry facing increased demand, the market adjusts to bring the price back to its original equilibrium while increasing output. Prices remain the same, and market output increases as new firms enter the market to take advantage of short-run profits, expanding the overall market supply.

Step-by-step explanation:

Assuming that competitive firms and a competitive market are in long-run equilibrium in a constant cost industry, and then demand increases, the market will adjust in the long run. Initially, due to increased demand the market price will go up, and the existing firms will increase their production to where P = MR = MC.

In the long run, however, new firms will enter the market because of the opportunity to earn positive economic profits. This increase in supply, driven by new firms entering the market, will eventually bring the price back down to its original equilibrium level.