Suppose That Pasta Is Produced Under Conditions of Perfect Competition

question 71

Multiple Choice

Suppose that pasta is produced under conditions of perfect competition and that the constant-cost industry is initially in long-run equilibrium. Now suppose there is an increase in the price of wheat, which is a key ingredient in producing pasta. Further assume that the price elasticity of demand for pasta is -1.8. In the long run, we would expect to see:

• A) new firms entering the industry.
• B) firms leaving the industry.
• C) no entry or exit, since neither is possible in perfect competition.
• D) not enough information is given to answer the question.

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