Which Ordering Best Describes How a Perfectly Competitive Industry Would

question 67

Multiple Choice

Which ordering best describes how a perfectly competitive industry would respond to a sudden increase in popularity of the product? The market demand function will shift to the right,causing the market:

• A)price to increase,and a new stable equilibrium to be established at a higher price and higher quantity.
• B)price to increase,and all firms in the industry will earn higher profits for the foreseeable future.
• C)price to increase.Increased profits will encourage new firms to enter,shifting the market supply function to the right.Long-run market equilibrium will be at a higher quantity than before the surge in popularity.
• D)price and quantity supplied to increase.Increased profits will encourage new firms to enter shifting the market supply function upward.Long-run market equilibrium will be at a lower quantity and higher price than before the surge in popularity.

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Definitions:

Perfectly Elastic

A situation in which the quantity demanded or supplied changes infinitely in response to any change in price.

Government Revenue

The income received by government from taxes, fees, and other sources used to fund public services and obligations.

Tax

A mandatory fiscal fee or different form of levy placed on a taxpayer by a government entity to finance government expenditures and a range of public spending.

Inelasticities

A measure of the sensitivity, or lack thereof, of one variable to a change in another variable, typically used in economics to describe situations where changes in price have little to no effect on supply or demand.