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

Question

Consider a perfectly competitive market for a product X that is in its long run equilibrium. Suppose that this is an inferior 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 of X traded 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

The answer should be C. Because of the decrease in demand caused by the income increase (because the good is inferior), the demand curve for the industry will shift to the left. This will cause a decrease in price. However, the decrease in price will lead to a negative economic profit, causing firms to leave the industry in the long run.

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