Question

Which is the correct answer

Assume a purely competitive decreasing-cost industry is initially in long-run equilibrium, producing 6 million units at a market price of $25.00. Suppose that in increase in consumer demand occurs. After all economic adjustments have been completed, which output and price combination is most likely to occur?

A. 6.5 units at a price of $26.75

B. 7 units at a price of $23.50

C. 6 units at a price of $24.00

D. 5.5 units at a price of $24.50

Answer 1

Option

B. 7 units at a price of $23.50

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Consumer demand increases and shifts the demand curve to the right which increases price and quantity in the short run and firms earn an economic profit in the short run. It encourages new firms to enter the market and shifts the supply curve to the right up to long-run average cost is equal to price. The LRATC is decreasing as the industry is decreasing cost industry so the new equilibrium is at lower ATC and higher output than before. So the price decreases and output increases.

Ouput is above 6 million and price is below $25, from the options its 7 units at a price of $23.50