A Constant-Cost, Perfectly Competitive Market Is in Long-Run Equilibrium

question 120

Multiple Choice

A constant-cost, perfectly competitive market is in long-run equilibrium.At present, there are 1,000 firms each producing 400 units of output.The price of the good is $60.Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $64.In the new long-run equilibrium, how will the average total cost of producing the good compare to what it was before the price of the good rose?

• A)The average total cost will be higher than it was before the price increase since the increase in demand will drive up input prices.
• B)The average total cost will be lower than it was before the price increase because of economies of scale.
• C)The average total cost will be higher than it was before the price increase because of diseconomies of scale arising from the increased demand.
• D)The average total cost will be the same as it was before the price increase.

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Definitions:

Direct Labour-Hours

The total hours worked by employees directly involved in manufacturing a product.

Variable Manufacturing Overhead

Manufacturing costs that vary in total directly with changes in production volume, such as utility costs or raw material consumptions.

Direct Materials

Raw materials that are directly traceable to the manufacturing of a specific product.

Actual Hours

The real number of hours worked, as opposed to planned or scheduled hours.