Suppose one firm in a perfectly competitive industry experiences an increase in its costs of production. Which of the following best describes the most likely long run adjustment to this situation?

Question

Quizplus · Accepted Answer

In the short run, the firm may try to pass on the increased cost to consumers by raising its price, but in the long run, other firms will enter the industry, driving down the price to the original level. If the increase in cost persists, the firm will continue to make losses, and eventually, it may exit the industry. Therefore, option C is the most likely long run adjustment to the situation. Option A and D are incorrect because not all firms will necessarily experience the same increase or decrease in costs. Option B is also incorrect because in a perfectly competitive market, firms cannot simply raise prices and expect consumers to pay for their increased costs.

Suppose One Firm in a Perfectly Competitive Industry Experiences an Increase