When the free market reacts to a sudden demand decrease, the equilibrium price and quantity both decrease, some firms exit while others reduce output, but only after a considerable time period.

Question

Quizplus · Accepted Answer

This is true as firms need time to adjust their production and determine whether or not they should exit the market. The decrease in quantity and price occurs as a result of the market responding to the decrease in demand.

When the Free Market Reacts to a Sudden Demand Decrease