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.

---

Definitions:

Equilibrium Price

The price at which the quantity of a good or service demanded equals the quantity supplied, resulting in a balance between production and consumption.

Equilibrium Quantity

The volume of commodities or services provided that coincides with the volume requested at the price of market balance.

Normal Good

A normal good is one whose demand increases when consumers' incomes increase and falls when incomes decrease, all else being equal.

Equilibrium Quantity

The quantity of a good or service at which supply and demand are balanced in a market.