Question

Suppose the pizza industry is a constant cost industry. Suppose further that this industry is perfectively competitive and economic profits are achieved. In this case, we should expect that industry supply to: A. increase, output to decrease, price to decrease, and profits to decrease. B. decrease, output to decrease, price to increase, and profits to increase. C. increase, output to increase, price to increase, and profits to decrease. D. increase, output to increase, price to decrease, and profits to decrease. E. All of the other answers are incorrect.

Answer 1

The industry is perfectly competitive and economic profits are achieved then there will be new entrants in the industry which would increase the industry supply. This would lead to the output to increase. Due to increase in Supply, price will Decrease which will lead to a Decrease in the profits.

Hence, if this industry is perfectly competitive and economic profits are achieved then we should expect industry supply to increase, output to increase, price to decrease and profits to decrease.

Therefore, Option D is correct.