Question

Assume that olive oil is produced in a constant- cost, perfectly competitive industry, which is currently in long-run equilibrium. If the current price of olive oil is $5 per quart and the demand for olive oil increases, then the price of olive oil will change in which of the following ways in the short run and long run?

Short Run Long Run
Be more than $5 Be more than $5

a

Short Run Long Run
Be more than $5 Be equal to $5

b

Short Run Long Run
Be equal to $5 Be equal to $5

c

Short Run Long Run
Be less than $5 Be less than $5

d

Short Run Long Run
Be less than $5 Be equal to $5

Answer 1

Answer: b.

Explanation: With a sudden demand increase, the short-run supply is fixed so the market price rises above $5. In a constant-cost, perfectly competitive industry entry occurs until economic profits are driven to zero; long-run supply is perfectly elastic at the original cost, so price returns to $5.