25. Suppose the market for corn is a purely competitive, constant-cost industry that is in long-run equilibrium. Now assume that an increase in consumer demand occurs. After all resulting adjustments have been completed, the new equilibrium price will be

A. the same as the initial equilibrium price, but the new industry output will be greater than the original output.
B. greater than the initial price, and the new industry output will be greater than the original output.
C. less than the initial price, but the new industry output will be greater than the original output.
D. the same as the initial equilibrium price, and the industry output will remain unchanged.

Question

25. Suppose the market for corn is a purely competitive, constant-cost industry that is in long-run equilibrium. Now assume that an increase in consumer demand occurs. After all resulting adjustments have been completed, the new equilibrium price will be

A.  the same as the initial equilibrium price, but the new industry output will be greater than the original output.
B. greater than the initial price, and the new industry output will be greater than the original output.
C. less than the initial price, but the new industry output will be greater than the original output.
D. the same as the initial equilibrium price, and the industry output will remain unchanged.

BlackTom AI · Accepted Answer

Long-run supply in a constant-cost, perfectly competitive industry is perfectly elastic at the minimum long-run average cost (LRAC), so the long-run equilibrium price will remain at that minimum LRAC even after demand changes.

1. Relevant knowledge points and concepts
- Perfect competition: firms are price takers, produce where P = MC in the short run, and in the long run firms earn zero economic profit (P = min LRAC).
- Constant-cost industry: input prices do not change as industry output expands, so the long-run industry supply curve is horizontal (perfectly elastic) at the minimum LRAC.
- Entry and exit: short-run positive profits attract entry; entry increases industry supply until profits are driven to zero and price returns to the long-run level.

2. Complete reasoning process step by step
- Start at initial long-run equilibrium: price P0 = min LRAC, industry quantity Q0, firms earning zero economic profit.
- Demand increases (D → D1). Short run: with fixed number of firms, the market price rises to P1 > P0 and quantity rises to Q1. At P1 each firm makes positive economic profit because P1 > min LRAC.
- Positive profits induce entry of new firms. Because the industry is constant-cost, input costs (and each firm’s cost curves) do not rise as the industry expands.
- Entry shifts short-run industry supply rightward. Entry continues until economic profit is eliminated; that occurs when price falls back to P0 (the horizontal long-run supply).
- The final long-run quantity Q2 > Q0 because the rightward shift of supply increases total industry output at the unchanged long-run price P0.

3. Intermediate steps (symbolic)
- Initial: P0 = min LRAC, Q0.
- Short run after demand shock: D1 ∴ price P1 > P0, quantity Q1 > Q0.
- Entry increases supply: S → S2, price falls to P2 = P0, quantity increases to Q2 (> Q0).
- Profit per firm during entry: π = (P1 − ATC) > 0 → entry until P → P0, π → 0.

4. Why the correct answer is correct
Because in a constant-cost industry the long-run supply is horizontal at the original equilibrium price, any demand-induced short-run price rise is eliminated by entry. The price returns to the initial level while industry output is permanently higher due to the increased number of firms. That exactly matches option A.

5. Why the other options are incorrect
- B (price greater in new equilibrium): incorrect because entry drives price back to P0 in the long run, so price does not remain greater.
- C (price less than initial): incorrect because demand increase cannot reduce the long-run price in a constant-cost industry with horizontal LR supply.
- D (price and output unchanged): incorrect because output does increase (more firms produce) even though price returns to the original level.

6. Conclusion
The correct long-run outcome is that the equilibrium price equals the initial price while industry output is larger, confirming answer A.

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