Question

The Tree selling industry is a perfectly competitive increasing-cost industry. The indusrty is in its long-run equilibrium. Sudden there is a decline in the damnd for trees. What will the firms in this industry do? A. Firms will want to enter this industry and price and quantity will both rise. B. Firms will leave the industry and price and output will both rise. C. Firms will leave the industry and price rise and output will decline. D. All of the other answers are incorrect E. Firms will leave the industry and we should expect price will falland quantity produced will rise.

Answer 1

Ans. OPTION C
A decrease in demand for trees leads to decrease in price of trees. This leads to losses for the firms. So, firms start exiting the industry which decreases the market supply if trees, increasing the price to the initial level bringing the economy back ti long run equilibrium. But due to decrease in supply, the equilibrium quantity if trees in the market decreases.

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