Suppose that pasta is produced under conditions of perfect competition and that

Question

Suppose that pasta is produced under conditions of perfect competition and that the constant-cost industry is initially in long-run equilibrium. Now suppose there is an increase in the price of wheat, which is a key ingredient in producing pasta. Further assume that the price elasticity of demand for pasta is -1.8. In the short run, we would expect to see:
A/most firms in the industry earning positive economic profits.
B/most firms in the industry earning zero economic profits.
C/most firms in the industry earning negative economic profits.
D/not enough information is given to answer the question.

2/A decrease in production costs for firms in a perfectly competitive market will cause a(n):
A/permanent increase in price.
B/economic profit for firms in the short run.
C/increase in demand.
D/increase in firms' marginal revenue.

Explanation / Answer

C/most firms in the industry earning negative economic profits. B/economic profit for firms in the short run.

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