Assume a purely competitive increasing-cost industry is initially in long-run equilibrium, producing 10 million units at a market price of $5.00. 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)11 units at a price of $4.75.
B)12 units at a price of $5.50.
C)9.5 units at a price of $4.50.
D)9 units at a price of $5.25.

Question

Quizplus · Accepted Answer

In an increasing-cost industry, when demand increases, both the output and the price are likely to increase in the long run. This is because the costs of production for firms in the industry will rise as they expand output, leading to a higher equilibrium price. Option B reflects an increase in both output and price, consistent with the characteristics of an increasing-cost industry responding to an increase in demand.

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