Assume a purely competitive, increasing-cost industry is in long-run equilibrium. If a decline in demand occurs, firms will
A) leave the industry, price will decrease, and quantity produced will increase.
B) enter the industry and price and quantity will both increase.
C) leave the industry and price and output will both increase.
D) leave the industry and price and output will both decline.

Question

Quizplus · Accepted Answer

In a purely competitive, increasing-cost industry, firms will exit the industry in response to a decline in demand as they are no longer able to cover their average total cost. The decrease in the number of firms will lead to a decrease in output and an increase in price in the short run. However, in the long run, the decrease in firms will cause a shift in supply to the left, which will cause price and output to both decline.

Assume a Purely Competitive, Increasing-Cost Industry Is in Long-Run Equilibrium