Suppose a perfectly competitive increasing-cost industry is in long-run equilibrium when market demand suddenly decreases.What happens to the industry in the long run?

Question

Quizplus · Accepted Answer

In a perfectly competitive increasing-cost industry, firms are operating at the minimum point on their long-run average total cost curve at the equilibrium price and quantity. If there is a decrease in market demand, the equilibrium price falls.

As a result, firms experience a decrease in revenue, and their profit-maximizing level of output decreases.

In the long run, firms in the industry will exit as they earn negative economic profits at this lower price level. This exit of firms causes a decrease in industry supply, which shifts the supply curve to the left.

As the supply curve shifts leftward, the price will decrease further until the industry settles at a new long-run equilibrium price and quantity.

Since the industry is increasing cost, the new equilibrium price will be lower than the original one, and the new equilibrium level of output will be less than the initial long-run equilibrium level of output. Therefore, the best choice is C.

Suppose a Perfectly Competitive Increasing-Cost Industry Is in Long-Run Equilibrium