Suppose that pasta is produced under conditions of perfect competition and that the constant-cost industry is initially in long-run equilibrium. Now suppose there is an increase in the price of wheat, which is a key ingredient in producing pasta. Further assume that the price elasticity of demand for pasta is -1.8. In the long run, we would expect to see:

Question

Quizplus · Accepted Answer

The increase in the price of wheat will cause the cost of production to rise, leading to lower profits for pasta producers in the short run. As the price elasticity of demand is relatively high, the decrease in quantity demanded will also put pressure on profits. In the long run, firms will exit the industry as they struggle to maintain profitability. This will lead to a decrease in supply, which will eventually lead to a new long-run equilibrium with a higher price and lower quantity, assuming no further changes in cost or demand occur. Therefore, the correct answer is B.

Suppose That Pasta Is Produced Under Conditions of Perfect Competition