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

Question

Quizplus · Accepted Answer

In a perfectly competitive increasing-cost industry, an increase in demand will lead to an increase in the market price. This increase in price will induce firms to expand their output, causing a consequent increase in the demand for inputs. As the industry is increasing cost, the expansion of output will cause the average total cost of producing a unit to increase. Therefore, the typical firm will experience a higher average total cost and equilibrium price in the long run.

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