Assume a purely competitive constant-cost industry is initially in long-run equilibrium, producing 9 million units at a market price of $18.00. Suppose that an increase in consumer demand occurs. After all economic adjustments have been completed, which output and price combination is most likely to occur?
A)9.5 units at a price of $19.25.
B)10 units at a price of $18.00.
C)9 units at a price of $20.00.
D)8 units at a price of $18.00.

Question

Quizplus · Accepted Answer

In a purely competitive constant-cost industry, an increase in demand will initially raise the price, leading to higher profits and attracting more firms into the industry. As new firms enter, supply increases, which brings the price back down to its original level. The output increases to meet the higher demand, but the price returns to its initial level due to the constant-cost nature of the industry, making option B the correct choice.

Assume a Purely Competitive Constant-Cost Industry Is Initially in Long-Run