Suppose that the market for cab rides is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for cab rides. In the long run, cab drivers will _____ the market, driving the price of cab rides _____ and the profits of individual drivers _____.
A)enter; up; back to zero
B)enter; down; back to zero
C)leave; up; up
D)leave; up; back to zero

Question

Quizplus · Accepted Answer

An increase in demand will lead to an increase in price in the short run, but in the long run, new cab drivers will enter the market to take advantage of the higher profits. As more drivers enter the market, the supply of cab rides will increase, driving down the price back to the original long-run equilibrium level. The profits of individual drivers will also decrease in the long run as competition increases.

Suppose That the Market for Cab Rides Is Initially in Long-Run