An increase in the price of an input to a perfectly competitive industry will:
A)increase price and reduce the number of firms.
B)increase price and increase the number of firms.
C)increase price and have an ambiguous effect on the number of firms.
D)reduce the number of firms and have an ambiguous effect on price.

Question

An increase in the price of an input to a perfectly competitive industry will:​
A)​increase price and reduce the number of firms.
B)​increase price and increase the number of firms.
C)​increase price and have an ambiguous effect on the number of firms.
D)​reduce the number of firms and have an ambiguous effect on price.

Quizplus · Accepted Answer

An increase in the price of an input will increase the cost of production for each individual firm in the industry, leading to an increase in the market price of the product. This will deter some firms from continuing operation and lead to a reduction in the number of firms in the industry. However, it is also possible that new firms may enter the industry if they can produce the product at a lower cost using alternative inputs. Therefore, the effect on the number of firms is ambiguous.

An Increase in the Price of an Input to a Perfectly