A Perfectly Competitive Market Is in Long-Run Equilibrium

question 146

Multiple Choice

A perfectly competitive market is in long-run equilibrium.At present there are 100 identical firms each producing 5000 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 increases, resulting in no change in profit.
• D) In the short run, the typical firm increases its output but its total cost also increases. Hence, the effect on the firm's profit cannot be determined without more information.

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