Question

Suppose there is a shortage in a local market for clean drinking water (assume this market is free and competitive). Which of the following most accurately explains why the shortage will not last in this market? red out of Select one: a. Buyers will compete with other buyers and push the price up thus creating an incentive for firms to bring more water to the area tion b. The price will not increase but firms will increase the quantity supplied to promote the social interest.c. The government will set a lower price so that more people can buy water d. Sellers will charge a lower price so it can sell more water

Answer 1

Answer:

The correct answer is letter "B": The price will not increase but firms will increase the quantity supplied to promote the social interest.

Explanation:

Perfectly competitive markets are characterized by having companies offering an undifferentiated product, being price takers because firms posses a small market share which does not allow them to have a major influence in the price, and by free entry and exit of competitors.

Then, if there is a shortage of clean drinking water in a local market that is perfectly competitive, the shortage would not last much since new producers would enter the market to process water so it can be offered purified. As drinking water is a basic good, the number of organizations entering the market is likely to be substantial.