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Question
Macroeconomics
Posted 9 months ago
If shark repellent is produced in a perfectly competitive market and its long-run supply curve is horizontal, which of the following must be true?
Choose 1 answer:
(A) An increase in demand in this market increases prices in the longrun.
(B) The marginal cost curve for a firm in this industry decreases as more firms enter.
(c) When more firms enter this market, each firm's average total cost curve increases.
(D) When more firms enter this market, input prices increase.
(E) When more firms enter this market, input prices don't change.
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Answer from Sia
Posted 9 months ago
Solution
a
Horizontal Long-Run Supply Curve: A horizontal long-run supply curve implies that the industry is a constant cost industry
b
Entry of Firms and Input Prices: In a constant cost industry, the entry of new firms does not affect the prices of inputs because the industry's demand for resources does not significantly alter the resource prices
c
Market Price: Since the long-run supply curve is horizontal, an increase in demand will result in an increase in output without changing the market price in the long run
Answer
(E) When more firms enter this market, input prices don't change.
Key Concept
Constant Cost Industry
Explanation
In a constant cost industry, the entry of new firms does not affect input prices, which is why the long-run supply curve is horizontal.
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