Asked by Timothy Robinson on Jul 15, 2024
Verified
Purely competitive industry X has decreasing costs and its product is an inferior good. The industry is currently in long-run equilibrium. The economy now goes into a recession and average incomes decline. The result will be
A) an increase in output and in the price of the product.
B) an increase in output, but not in the price of the product.
C) a decrease in the output, but not in the price of the product.
D) a decrease in output and in the price of the product.
Decreasing Costs
A situation where the total cost of production decreases as the volume of production increases.
Inferior Good
A type of good for which demand decreases as the income of consumers increases, inversely related to normal goods.
Long-Run Equilibrium
A state in which all factors of production and costs are variable, and economic forces are balanced, leading to no net inclination to change.
- Clarify the dynamics of supply and demand adjustments among different industry types (decreasing-cost, increasing-cost, constant-cost) with fluctuations in market circumstances.
Verified Answer
DM
Delyisa McallisterJul 16, 2024
Final Answer :
B
Explanation :
In a recession, average incomes decline, leading to an increased demand for inferior goods (goods for which demand increases as income decreases). In a purely competitive industry with decreasing costs, this increased demand will lead to an increase in output. However, due to the decreasing cost nature of the industry, the increased output can be produced at a lower average cost, which means the price of the product does not necessarily increase and might even decrease or stay the same.
Learning Objectives
- Clarify the dynamics of supply and demand adjustments among different industry types (decreasing-cost, increasing-cost, constant-cost) with fluctuations in market circumstances.