Assume a purely competitive constant-cost industry is initially at long-run equilibrium. Now suppose that a decrease in demand occurs. After all the long-run adjustments have been completed, the new equilibrium price
A)and industry output will be less than the initial price and output.
B)will be the same as the initial price, and the output will be less.
C)will be greater than the initial, but the new output will be less.
D)will be less than the initial price, but the new output will be greater.

Question

Quizplus · Accepted Answer

In a purely competitive constant-cost industry, a decrease in demand will lead to a decrease in output as firms reduce production in response to lower demand. However, because it is a constant-cost industry, the long-run equilibrium price returns to its original level after adjustments, as firms exit or enter the market to restore the profit to normal levels.

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