A perfectly competitive market is in long-run equilibrium.At present there are 100 identical firms each producing 5,000 units of output.The prevailing market price is $20.Assume that each firm faces increasing marginal cost.Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $24.Which of the following describes the effect of this increase in demand on a typical firm in the industry?
A)In the short run, the typical firm increases its output and makes an above normal profit.
B)In the short run, the typical firm's output remains the same but because of the higher price, its profit increases.
C)In the short run, the typical firm increases its output but its total cost also rises, resulting in no change in profit.
D)In the short run, the typical firm increases its output, but its total cost also rises. Hence, the effect on the firm's profit cannot be determined without more information.

Question

Quizplus · Accepted Answer

With the sudden increase in demand, the market price rises from $20 to $24. Since each firm faces increasing marginal cost, the marginal cost of producing an additional unit of output will now exceed the market price of $24 per unit. However, in the short run, the firm can increase its output by hiring more inputs, such as labor and capital, resulting in an increase in profit. This is because at the new price of $24, total revenue will be greater than total cost. Therefore, in the short run, the typical firm will increase its output and make an above normal profit.

A Perfectly Competitive Market Is in Long-Run Equilibrium