A Perfectly Competitive Market Is in Long-Run Equilibrium

question 90

Multiple Choice

A perfectly competitive market is in long-run equilibrium.At present there are 100 identical firms each producing 5,000 units of output.The prevailing market price is $20.Assume that each firm faces increasing marginal cost.Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $24.Which of the following describes the effect of this increase in demand on a typical firm in the industry?

• A)In the short run, the typical firm increases its output and makes an above normal profit.
• B)In the short run, the typical firm's output remains the same but because of the higher price, its profit increases.
• C)In the short run, the typical firm increases its output but its total cost also rises, resulting in no change in profit.
• D)In the short run, the typical firm increases its output, but its total cost also rises. Hence, the effect on the firm's profit cannot be determined without more information.

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Definitions:

FIFO

An inventory valuation method that assumes the first items purchased are the first ones sold, standing for "First In, First Out."

Gross Profit

The difference between sales revenue and the cost of goods sold before accounting for other operating expenses.

Physical Inventory

The process of counting and verifying the actual inventory on hand at a business location.