Chapter 60, Problem 7MCQ

To determine

Impact of increase in demand in case of constant cost industry.

Answer to Problem 7MCQ

(d) An increase in industrial output.

Explanation of Solution

Since there is a constant cost industry so there is no incentive to increase output by the existing firm and the supply curve is horizontal which means the firm can sell as much output at a constant price. As demand increases, the demand curve shifts upward. As a result, industrial output increases but prices remain the same. Hence, option (d) is correct, and (a), (b), and (c) are incorrect.

In this case, the price remains constant and no decreasing cost industry (Economies of scale) so the firm earns only normal profit. Hence, option (e) is incorrect.

Economics Concept Introduction

Introduction:

In the case of a constant-cost industry, due to a perfectly elastic supply of inputs and very low input demand price of the input does not change as the size of the industry changes. In a constant cost industry, the long-run supply curve is horizontal.