Suppose each firm's long-run average cost of production does not vary with the entry of new firms in a perfectly competitive industry and a long-run adjustment results in a smaller industry output but leaves price unchanged.Which of the following is likely to be true in this case?

Question

Quizplus · Accepted Answer

If the long-run average cost of production does not vary with the entry of new firms, it means that the industry is a constant-cost industry. This implies that the supply of inputs needed in the production process is available at constant prices. In this case, if a long-run adjustment results in a smaller industry output but leaves price unchanged, it implies that the market supply and demand curves have not shifted. Instead, the smaller industry output is due to the fact that the market price remains constant, and firms are producing only what they can profitably produce at that price level. Therefore, the only feasible option is E.

Suppose Each Firm's Long-Run Average Cost of Production Does Not