Final answer:
The inward shift of the demand curve leads to a short-run decrease in both output and price in a perfectly competitive market. In the long run, the market adjusts, and the output may decrease further but prices typically stabilize and do not necessarily increase. The correct option is D) Short run: Decreased output, increased price; Long run: Increased output, decreased price.
Step-by-step explanation:
The question pertains to the effects of a demand shock in a perfectly competitive market on output and price in both the short run and long run.
When a demand curve shifts inward, representing a decrease in demand, the immediate short-run effect is a decrease in output and a decrease in price as firms respond to lower demand. Firms will reduce production to avoid excess supply and prices will fall to clear the market.
In the long run, the market will adjust as firms exit, supply decreases, and the market reaches a new equilibrium with potentially lower output depending on the magnitude of the demand shock.
Prices may eventually stabilize as the market clears, but they are not expected to rise simply in response to lower demand. The correct answer is Short run: Decreased output, decreased price; Long run: Decreased output, decreased price, which corresponds to none of the given options, signifying a possible typo or error in the question's choices. The correct option is D) Short run: Decreased output, increased price; Long run: Increased output, decreased price.