If an industry that experiences external economies is in a long-run equilibrium, then an increase in market demand causes
A)a decrease in price in the short run, with the price returning to its former level in the long run.
B)an increase in price in the short run, with the price returning to its former level in the long run.
C)an increase in price in the short run, but the price falls below its former level in the long run.
D)an increase in price in the short run, with the price rising above its former level in the long run.
E)nothing to change in the market.

Question

Quizplus · Accepted Answer

In industries with external economies, as production increases, costs per unit decrease. Thus, an increase in market demand initially raises prices due to higher demand. Over time, as the industry expands and benefits from external economies (e.g., improved technology, better supply chains), costs decrease, leading to lower prices than before the demand increase.

If an Industry That Experiences External Economies Is in a Long-Run