Question

Dankia wants some information about perfectly competitive industry and its supply curve. You could tell her that A. All of the other answers are incorrect B. For a perfectly competitive decreasing-cost industry the long-run supply curve is somewhat elastic C. For a perfectly competitive increasing-cost industry the long-run supply curve does not exist D. For a perfectly competitive increasing-cost industry the long-run supply curve will be sloping downwards E. For a perfectly competitive decreasing-cost industry the long-run supply will be sloping upwards.

Answer 1

Answer - A. All of the other answers are incorrect
Increasing Cost industry- Positive sloped long-run supply curve
Decreasing Cost industry- Negatively sloped long-run supply curve
Constant cost industry- Horizontal long-run supply curve

Explanation-:
* Long run inustry supply curve explains relationship between market price and quantity supplied when all firms in industry earns normal profit. It can be positively sloped or negatively sloped or horizontal depending on whether there is constant or increasing or decreasing cost industry.

1) Constant cost industry -:
An industry is called cosnstant cost industry when price of input remains same even when market expands. As a result average cost curve will not shift.

As shown in dig. when market demand shift rightwards then price increases and at that higher price existing firms in market will earn super normal profit. Due to this new firms will enter in market. Consequently demand for input increases but under assumption of constant cost industry, price of input will remain same and therefore average cost curve will not shift. It means that with entery of new firms market supply shift rightwards and price returns back to initial level and therefore at same price quantity supplied in Industry increases. As a result Long run inustry supply curve is horizontal.

2) Increasing Cost industry-:
An industry is called increasing cost industry when price of input increases when market expands. It arises due to external diseconomies of scale where average cost of firm increases as size of industry expands. Since average cost increases. So industry can supply more of output only at higher prices. As a result Long run inustry supply curve is Positively sloped.

3) Decreasing Cost industry -:
An industry is called decreasing cost industry when price of input decreases when market expands. It arises due to external economies of scale. As a result average cost curce will shift downawards . So industry can supply more of output only at lower price. As a result Long run inustry supply curve is negatively sloped.