Answer to Question #76653 in Microeconomics for Edward Debate

Question

Consider a competitive constant-cost industry with many identical firms (i.e. firms with identical U-shaped cost curves). The demand curve in this market is downward sloping and the market is currently in a long-run equilibrium. Assume that there is an increase in demand, ceteris paribus. Compared to the initial long run equilibrium, which of the following statements is true?

A)In the new long run equilibrium price will be higher and each of the firms in the industry will be producing a greater amount of output.
B)In the new long run equilibrium price will be unchanged and each of the firms in the industry will be producing a greater amount of output.
C)In the new long run equilibrium price will be higher and each of the firms in the industry will be earning positive economic profit.
D)In the new long run equilibrium price will be unchanged and each of the firms in the industry will be earning zero economic profit.

Answer 1

In a competitive constant-cost industry with many identical firms, an increase in demand has no impact on production cost or the long-run average cost curve as new firms which enters the industry obtain resources at constant prices. In the new long run equilibrium, the shift in supply curve gradually matches the shift of the demand curve. Hence comparing to initial long run equilibrium, statement D is true.