Suppose a perfectly competitive industry is in long- run equilibrium. A new one- time cost- saving technology is then developed and new plants are built. Eventually, a new long- run equilibrium will be established where
A) new plants employ the new technology, but existing plants continue to produce as long as they cover their fixed costs.
B) all plants use the new technology, and market output will be higher.
C) high- cost and low- cost firms exist side by side and market output will be higher.
D) all plants continue to operate until they are physically worn out as long as price is greater than the the firm's average variable cost.
E) the industry supply curve has shifted to the left and price and output are both higher.

Question

Quizplus · Accepted Answer

In the long-run, firms have the flexibility to adopt new technologies and adjust their production processes. Therefore, all plants will eventually adopt the new technology and produce at lower costs, leading to a new equilibrium with higher market output. The other options are unlikely as in the long-run, firms that cannot cover their fixed costs will exit the industry, high-cost firms will not be able to compete and produce at higher costs, and firms will not continue to operate if they cannot cover their variable costs.

Suppose a Perfectly Competitive Industry Is in Long- Run Equilibrium