Sia
Question
Macroeconomics
Posted 9 months ago
If the market for tacos is a perfectly competitive decreasing cost industry, which of the following is also true?
Choose 1 answer:
(A) An increase in demand increases prices in the long run.
(B) An increase in demand has no effect on a typical firm's average total cost in the long run.
(C) An increase in demand decreases prices in the long run.
(D) An increase in demand increases a typical firm's average total cost curve.
(E) An increase in demand has no effect on prices in the long run.
Sign in to unlock the answer
Answer from Sia
Posted 9 months ago
Solution
a
Characteristics of a Perfectly Competitive Market: In a perfectly competitive market, firms are price takers, meaning they accept the market price as given. The demand curve for an individual firm is perfectly elastic, indicating that the firm can sell any quantity of goods at the market price
b
Decreasing Cost Industry: A decreasing cost industry is one in which an increase in industry output leads to a lower average total cost for firms. This can occur due to factors such as economies of scale, technological improvements, or learning by doing
c
Long-Run Equilibrium: In the long run, firms in a perfectly competitive market will adjust their output so that price equals the minimum point of the average total cost curve. This ensures that firms make zero economic profit in equilibrium
d
Impact of Increased Demand: An increase in demand in the short run will lead to higher prices and profits, attracting new firms to the market. In the long run, the entry of new firms will increase supply, driving down prices. In a decreasing cost industry, the average total cost will also decrease as output expands
Answer
(C) An increase in demand decreases prices in the long run.
Key Concept
Long-Run Adjustment in a Decreasing Cost Industry
Explanation
In a perfectly competitive decreasing cost industry, an increase in demand leads to a long-run decrease in prices due to economies of scale and the entry of new firms, which increases supply and lowers the average total cost.
Not the question you are looking for? Ask here!
Enter question by text
Enter question by image
Unlock Smarter Learning with AskSia Super!
Join Super, our all-in-one AI solution that can greatly improve your learning efficiency.
30% higher accuracy than GPT-4o
Entire learning journey support
The most student-friendly features
Study Other Question