Suppose there is a large and permanent increase in the demand for a good produced in a competitive industry. We should expect that:
A) existing firms will face lower sunk costs.
B) competition in the industry will decrease.
C) existing firms' average cost curves will shift upward.
D) firms will enter the industry because the market price will rise.

Question

Quizplus · Accepted Answer

A permanent increase in demand for a good in a competitive industry will lead to a rise in market price. This increase in price will attract new firms to enter the market, as they will be able to achieve economic profits. This will result in increased competition, which typically leads to increased efficiency and lower prices for consumers. Existing firms may face some short-term adjustment costs as they adapt to the changing market conditions, but in the longer term, they are likely to benefit from the growth of the market.

Suppose There Is a Large and Permanent Increase in the Demand