In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand? A) P AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0 B) P AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0 C) P

Question

In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?
A) P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0
B) P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0
C) P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0
D) P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20

Quizplus · Accepted Answer

In a constant cost industry, an increase in demand initially raises the price above average cost (P > AC), leading to economic profits. This attracts new firms, increasing supply and shifting the supply curve right, which eventually lowers the price back to the original level where P = AC, eliminating economic profits.

In a Constant Cost Industry, P = AC = $20