Suppose an industry that experiences external diseconomies is in a long-run equilibrium. A decrease in demand causes a(n)
A)decrease in price in the short run, with price returning to its former level in the long run.
B)decrease in price in the short run, with price returning to less than its former level in the long run.
C)decrease in price in the short run, with price rising above its former level in the long run.
D)decrease in output in the short run, with output returning to its former level in the long run.
E)increase in output in the short run and even more increase in the long run.

Question

Quizplus · Accepted Answer

In an industry experiencing external diseconomies, a decrease in demand would cause a decrease in price in the short run as firms try to maintain their market share. However, in the long run, firms will face higher costs due to the external diseconomies, which would result in a decrease in supply and a further decrease in price, returning to less than its former level. This is because the decrease in demand has worsened the external diseconomies, making it more expensive for firms to produce their products.

Suppose an Industry That Experiences External Diseconomies Is in a Long-Run