A Perfectly Competitive Industry with Constant Costs Initially Operates in Long-Run

question 1

Multiple Choice

A perfectly competitive industry with constant costs initially operates in long-run equilibrium. When demand increases:

• A) in the short run, prices and profits will be higher, but in the long run, price will fall back to its original level and firms will again earn zero economic profit.
• B) in the long run and the short run, prices and profits will be higher than before the demand increase.
• C) in the short run, prices and profits will fall, but in the long run, price will rise back to its initial level, as will profits.
• D) in the long run and the short run, prices and profits will be lower than before the demand increase.

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Definitions:

Evaluation

The systematic process of assessing the value, importance, or effectiveness of something through analysis and comparison of data.

Concomitant Variation

A phenomenon where changes in one variable are associated with changes in another variable, suggesting a possible correlation or causal relationship.

Causality

The relationship between cause and effect, where one event (the cause) brings about another event (the effect).

Transition

The process or period of changing from one state or condition to another.