Suppose that the market for haircuts in a community is perfectly competitive and that the market is initially in long-run equilibrium.Subsequently,an increase in population increases the demand for haircuts.In the short run,the typical firm is likely to:

Question

Quizplus · Accepted Answer

An increase in population and demand for haircuts will cause the equilibrium price to increase in the short run. While the typical firm can increase its output to meet the higher demand for haircuts, it will face higher costs due to the law of diminishing returns. As a result, the firm's average total cost will be higher than the equilibrium price, leading to an economic profit. However, in the long run, other firms are likely to enter the market, leading to an increase in the supply of haircuts and a decrease in the price. Therefore, the economic profit earned by the firm will eventually be eroded, and the market will return to long-run equilibrium.

Suppose That the Market for Haircuts in a Community Is