Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, and that the price of each candy cane is $0.10. Now suppose that the price of sugar rises, increasing the marginal and average total costs of producing candy canes by $0.05; there are no other changes in production costs. Based on the information given, we can conclude that in the long we will observe:

Question

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The increase in production costs will cause profits to decrease for all firms in the industry. As a result, some firms will no longer be profitable and will exit the industry in the long run. The remaining firms will continue to produce candy canes at a higher cost, but the market price will not increase to compensate for the increased costs, leading to a decreased quantity of candy canes supplied in the long run.

Suppose That the Market for Candy Canes Operates Under Conditions