Figure 8.8.1 -Refer to Figure 8.8.1 above. After the increase in demand, from D₁ to D₂ in panel (b), and being this a constant-cost industry, what is likely to happen in the market? A) Supply will not shift, and the market will settle in equilibrium at point B. B) Supply will shift to S₂ and the market will settle in equilibrium at point C. C) Supply will shift to S₂ and the market will settle in equilibrium back at point A, after going through B and then C. D) Supply will not shift and the market will settle in equilibrium back at point A after moving only temporarily to point B.

Question

Quizplus · Accepted Answer

Since this is a constant-cost industry, an increase in demand will result in a higher equilibrium quantity, but no change in the equilibrium price. Therefore, supply will shift to S₂ and the market will settle in equilibrium at point C, where the new demand curve intersects the new supply curve.

Figure 8.8.1 -Refer to Figure 8.8.1 Above. After the Increase in Demand