Suppose sharply higher coffee prices lead to an increase in demand for tea. As tea prices increase, tea producers experience short-run economic profits. If the tea industry is a price-taker industry and if sufficient time is allowed for the market to adjust fully to the increase in demand for tea, one would expect the tea industry's output to
A) increase, and economic profits to increase as well.
B) increase, and economic profits to disappear.
C) decline, and economic profits to increase.
D) decline, and economic profits to disappear.

Question

Quizplus · Accepted Answer

In a price-taker industry, short-run economic profits attract new firms, increasing supply until profits are eliminated, leading to higher output but normal profits in the long run.

Suppose Sharply Higher Coffee Prices Lead to an Increase in Demand