Chapter 11R, Problem 14MCQ

To determine

The correct option for given situation where the effect on existing firm due to increase in demand in perfectly competitive increasing cost industry takes place.

Answer to Problem 14MCQ

Option b is correct answer.

Explanation of Solution

Explanation for correct option:

b.

In a perfectly competitive increasing-cost industry, the prices will go up as the demand increases. This is also because the input cost is increased. There is a direct relationship between price sand demand as the demand increases, the prices also increases. Therefore, option b is correct.

Explanation for incorrect options:

a.

The prices will rise along with the input cost in an increasing cost industry as the demand increases. Therefore, option a is incorrect. c.

The prices will not fall instead it increases along with the input cost as the demand is increased. Therefore, option c is incorrect.

d.

In an increasing cost industry that operates under perfect competition, the prices and input costs will rise instead of declining. Therefore, option d is incorrect.

e.

The prices of the product changes as the input cost increases and the demand of the product increases. Therefore, option e is incorrect.

Economics Concept Introduction

Average total cost: Average total cost of production per unit is comprised of two cost components that is average fixed cost and average variable cost. In short-run, fixed cost of the production remains similar.