Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs. After all economic adjustments have been completed, product price will be
A) lower, but total output will be larger than originally.
B) higher, and total output will be larger than originally.
C) lower, and total output will be smaller than originally.
D) higher, but total output will be smaller than originally.

Question

Quizplus · Accepted Answer

In a purely competitive increasing-cost industry, an increase in consumer demand leads to an increase in product price and an increase in output. This is because the industry is characterized by upward-sloping long-run supply curves, which means that as output expands, the cost of production increases. However, since the industry is initially in long-run equilibrium, the increase in demand will lead to an increase in the price that firms receive for their product, which will induce them to expand output. This expansion will continue until the long-run supply curve intersects the new market demand curve at a higher equilibrium price and output level. Therefore, the price will be higher but total output will be larger than originally.

Assume a Purely Competitive Increasing-Cost Industry Is Initially in Long-Run