Question

In: Economics

In a perfectly competitive industry, a decrease in demand will have the following effect on equilibrium...

In a perfectly competitive industry, a decrease in demand will have the following effect on equilibrium firm/industry output:

a)As demand falls in a perfectly competitive industry, individual firms producing at minimum average cost will make short-run economic losses. Firms will start to leave the industry until neither economic losses or profits are made. Fewer firms will stay in the industry in the long-run again producing that output associated with their minimum average cost.

b)As demand falls in a perfectly competitive industry, firms will stay in the industry making economic losses until demand increases in the long-run.

c)As demand falls in a perfectly competitive industry, product price increases, resulting in economic profits. This encourages more firms to enter the industry, decreasing price and reducing the number of firms in the industry.

d)A decrease demand has no long-term impact on product price or the number of firms in a perfectly competitive industry.

Solutions

Expert Solution

Answer option A)As demand falls in a perfectly competitive industry, individual firms producing at minimum average cost will make short-run economic losses. Firms will start to leave the industry until neither economic losses or profits are made. Fewer firms will stay in the industry in the long-run again producing that output associated with their minimum average cost.

In a perfectly competitive industry, a decrease in demand will falls in a perfectly competitive industry, individual firms producing at minimum average cost will make short-run economic losses. Firms will start to leave the industry until neither economic losses or profits are made. Fewer firms will stay in the industry in the long-run again producing that output associated with their minimum average cost.


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