Purely competitive industry X has constant costs and its product is an inferior good. The industry is currently in long-run equilibrium. The economy now goes into a recession and average incomes decline. The result will be
A) an increase in output and in the price of the product.
B) an increase in output, but not in the price, of the product.
C) a decrease in the output, but not in the price, of the product.
D) a decrease in output and in the price of the product.

Question

Quizplus · Accepted Answer

In a recession, as average incomes decline, the demand for inferior goods increases. In a purely competitive industry with constant costs, the increased demand will lead to an increase in output, but the price will remain unchanged due to constant costs.

Purely Competitive Industry X Has Constant Costs and Its Product