Assume that a perfectly competitive constant-cost industry is in long-run equilibrium when market demand suddenly decreases.Which of the following statements is incorrect?

Question

Quizplus · Accepted Answer

If market demand suddenly decreases, in the short run, existing firms will suffer losses and some may shut down if their average variable cost exceeds average revenue at all output levels. However, in the long run, some firms will leave the industry which will decrease market supply, causing the market supply curve to shift to the left, not to the right (option D). This will eventually lead to equilibrium at a lower price and quantity, but any short-run losses will be eliminated in the long run as firms adjust their output levels and costs to the new market conditions.

Assume That a Perfectly Competitive Constant-Cost Industry Is in Long-Run