Figure 6.5
-Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry. The market is in equilibrium at point A, where 100 identical firms produce 6 units of a product per hour. If the market demand curve shifts to the right, which of the following statements is TRUE in the short run?

Question

Quizplus · Accepted Answer

In the short run, as the demand curve shifts to the right, the market price will rise to a new equilibrium point, which is higher than the original equilibrium price at point A. Due to the increase in price, the existing firms will experience an increase in profits, which will encourage them to maximize their profits by producing at the output level where marginal cost equals the new higher price. Since the firms are assumed to be identical, each firm would produce the same level of output as the others, thus leading to an increase in the market output level from 6 units per hour to 8 units per hour. Therefore, all the above statements are true in the short run.

Figure 6.5 -Figure 6.5 Shows the Short-Run and Long-Run Effects of an of an Increase