Question

Assume a perfectly competitive constant-cost industry is initially at long-run equilibrium. Now suppose that a decrease in market demand occurs. After all the long-run adjustments have been completed, the new equilibrium price Multiple Choice and
A. industry output will be less than the initial price and output.
B. will be the same as the initial price, and the output will be less.
C. will be greater than the initial price, but the new output will be less.
D. will be less than the initial price, but the new output will be greater.

Answer 1

Answer:

The correct answer will be option B.

Explanation:

A decline in the market demand will cause the demand curve to shift to the left. This leftward shift in the demand curve will lead to a decrease in the price as well as quantity. As the price of the commodity decline, the supply will get reduced as well. This is because supply and price are directly related.  

A reduction in supply will cause the supply curve to shift to the left. This leftward shift in the supply curve will cause an increase in the price until it reaches the initial level.

At this point, the quantity will be lower than earlier but the price will remain the same.