Consider a competitive market for a product X that is in its long run equilibriu

Question

Consider a competitive market for a product X that is in its long run equilibrium. Suppose that this is a normal good, and that consumer's income increases and the increase is expected to be permanent. Assuming that the prices of the inputs remain constant, then

A)the quantity demanded of X will decrease in the short run and the number of firms in the industry will go up in the long run

B)the price of X will increase in the short run and the number of firms in the industry will go up in the long run

C)the price of X will decrease in the short run and the number of firms in the industry will go down in the long run

D)None of the above

A)the quantity demanded of X will decrease in the short run and the number of firms in the industry will go up in the long run

B)the price of X will increase in the short run and the number of firms in the industry will go up in the long run

C)the price of X will decrease in the short run and the number of firms in the industry will go down in the long run

D)None of the above

Explanation / Answer

Answer is B. The price of X will increase in short run and the number of firms in the industry will go up in the long run.

Explanation:

The increase in income of consumer will lead to increase in demand and demand curve will shift to the right resulted in new equilibrium point with equilibrium price being higher in the short run and lead to earning of super profits. However, the new firms will get tempted by the super profits and take entry in the industry in the long run.

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