Purely competitive industry X has constant costs and its product is an inferior good. The industry is currently in long-run equilibrium. The economy now goes into a recession and average incomes decline. The result will be
A)an increase in output and in the price of the product.
B)an increase in output, but not in the price of the product.
C)a decrease in the output, but not in the price of the product.
D)a decrease in output and in the price of the product.

Question

Quizplus · Accepted Answer

Since the product is an inferior good, demand for it increases as average incomes decline. In a purely competitive industry with constant costs, this leads to an increase in output to meet the higher demand, but the price remains the same due to the industry's competitive nature and constant cost conditions.

Purely Competitive Industry X Has Constant Costs and Its Product