Suppose that there has been bad weather, a decrease in the availability of oil, or some other temporary increase in firms' costs and the economy has reached its new short-run equilibrium. What happens as the economy moves from this short-run equilibrium to long-run equilibrium?
A)Prices and output rise.
B)Prices and output fall.
C)Prices rise and output falls.
D)Prices fall and output rises.

Question

Quizplus · Accepted Answer

In the short run, the increase in costs leads to a decrease in output and an increase in prices. However, in the long run, firms have time to adjust their production methods, and new firms may enter the market. As a result, the economy will move towards a new long-run equilibrium where prices will fall and output will rise back to its potential level. Therefore, prices fall and output rises in the long run.

Suppose That There Has Been Bad Weather, a Decrease in the Availability