Suppose the industry producing mobile phones is a perfectly competitive constant

Question

Suppose the industry producing mobile phones is a perfectly competitive constant cost industry and is at its long run equilibrium in Jan 2016. In late February, an advertising campaign permanently increases demand going forward. Which one of the following predictions is most correct?

A. Firms will make profits in the short run (March) as well as in the long run (2016 and beyond).

B. In the long run the equilibrium price will be lower than the Jan 2016 price, and firms will make zero profits.

C. The long run number of firms in this market will be lower than the Jan 2016 number of firms.

D. The long run equilibrium price will be the same as the Jan 2016 price, but there will be more firms in the market.

E. There is insufficient information to answer this question.

Explanation / Answer

In a perfectly competitive industry in long-run equilibrium, P = LAC = LMC.

When demand increases, price also increases, resulting in short run economic profit for existing firms.

But in long run (beyond 2016), firms will be attracted by excess profit and will enter the market. New entrants will reduce existing firms' demand, the market supply will increase and so, price will reduce. This process will continue until all firms produce zero economic profits.

Correct option (C).

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.