An increase in the demand for a product and a reduction in its costs of production would:
A) Decrease the profits of producers
B) Encourage firms to leave an industry
C) Encourage firms to enter an industry
D) Cause a shortage of the product

Question

Quizplus · Accepted Answer

An increase in demand for a product would lead to increased sales and revenue for firms producing that product. If the cost of production also declines, firms would experience an increase in profits. This would incentivize new firms to enter the market in order to capitalize on the higher profits available. Therefore, choice C is the correct answer. Option A is incorrect because an increase in demand and a reduction in costs would lead to increased profits. Option B is incorrect because a reduction in production costs would encourage firms to stay in the industry rather than leave. Option D is incorrect because an increase in demand and a reduction in costs would make it less likely for a shortage to occur.

An Increase in the Demand for a Product and a Reduction