Question

Suppose a firm in a competitive market, like the one depicted in panel (a), observes market price rising from P1 to P2. Which of the following could explain this observation?
a. The entry of new firms into the market.
b. The exit of existing consumers from the market.
c. An increase in market supply from S0 to S1.
d. An increase in market demand from D0 to D1.

Answer 1

Answer:

The correct answer is D) An increase in market demand from D0 to D1

Explanation:

In a competitive market, there are enough firms so that no firm can influence prices significantly.

In such conditions, and holding all other variables constant, a increase in market price from P1 to P2 can only result from an increase in demand.

If more consumers want a product, and supply remains the same, the price of it will rise.