Question

Consider an industry populated by identical firms, facing constant input prices, and having all the other characteristics of a perfectly competitive market. Which of the following statements describes the new long-run market equilibrium resulting from a shift in demand?

A) a shift in demand has no effect on the long-run average cost and so there is no change in equilibrium price and quantity.

B) a shift in demand will change the equilibrium price and quantity.

C) a shift in demand has no effect on the long-run average cost, resulting in change in equilibrium quantity but not price.

D) a shift in demand has no effect on the long-run average cost, resulting in change in equilibrium price but not quantity.

E) a shift in demand is not possible

Answer 1

C) a shift in demand has no effect on the long-run average cost, resulting in change in equilibrium quantity but not price.

As shown below, an increase in demand shifts the demand curve to the right. After that, the firms respond to an increase in price. This results in an increase in supply but it matches the increase in demand due to constant per unit cost of production. This the long run supply curve remains constant along with equilibrium price but no change in the equilibrium quantity.