Sia
Question
Microeconomics
Posted 9 months ago
Coffee is produced in a constant cost industry and is sold in a perfectly competitive market.
If the market demand for this good increased, which of the following will happen in the long run?
Choose 1 answer:
- INCORRECT
The quantity of coffee sold in the market doesn't change.
Market quantity increases in the long run when demand increases.
- INCORRECT
Firms become allocatively inefficient.
Perfectly competitive firms are always allocatively efficient.
- INCORRECT
Firm's make economic profits.
This is true in the short run, but in the long run firms in perfectly competitive markets earn zero economic profits.
(D) The price of coffee stays the same.
(E) Average total costs increase.
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Answer from Sia
Posted 9 months ago
Solution
a
Market Demand Increase: When the market demand for coffee increases in a perfectly competitive market, the initial effect is an increase in the market price and quantity sold
b
Short-Run Profits: In the short run, firms in the market will experience economic profits due to the higher market price
c
Entry of New Firms: These economic profits attract new firms to enter the market, increasing the market supply
d
Long-Run Equilibrium: As new firms enter, the market supply increases, driving the price back down to the original level where firms earn zero economic profits
e
Constant Cost Industry: In a constant cost industry, the entry of new firms does not affect the average total cost, so the price of coffee remains the same in the long run
Answer
(D) The price of coffee stays the same.
Key Concept
Long-Run Equilibrium in Perfect Competition
Explanation
In the long run, firms in a perfectly competitive market earn zero economic profits. In a constant cost industry, the entry of new firms does not change the average total cost, so the price of coffee remains the same.
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