In a Constant Cost Industry, the Market Price and Average

question 9

Multiple Choice

In a constant cost industry, the market price and average cost are equal to $23. Therefore, which of the following is correct?

• A) An increase in demand will cause the short-run price to rise above $23, but in the long run, the price will return to $23.
• B) An increase in demand will cause profits to rise and firms to enter the industry until profits return to normal.
• C) A decrease in demand will cause market price to fall below average cost and thus firms will earn negative profits.
• D) All of the answers are correct.

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Definitions:

Family Resemblance Test

A legal test applied to determine whether a new financial instrument should be classified as a security under U.S. law.

Reves v. Ernst & Young

A significant court case that established a test for determining whether a transaction qualifies as a security under the securities laws.

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Howey Test

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