Firms are making profits in an increasing-cost industry. Which of the following statements describes what will happen in the long run?
A) More firms will enter this industry, causing the industry supply schedule to shift to the right and the LRAC curve facing firms to shift down.
B) More firms will enter this industry, causing the industry supply schedule to shift to the right and the LRAC curve facing firms to shift up.
C) Firms will exit this industry, causing the industry supply schedule to shift to the right and the LRAC curve to shift down.
D) Firms will exit this industry, causing the industry supply schedule to shift to the left and the LRAC curve to shift down.

Question

Quizplus · Accepted Answer

In an increasing-cost industry, as more firms enter the market due to profits, the demand for production inputs increases, leading to higher input costs. This causes the long-run average cost (LRAC) curve for firms to shift upwards, and the industry supply curve shifts to the right due to the increase in the number of firms.

Firms Are Making Profits in an Increasing-Cost Industry