Imagine a perfectly competitive market that is currently in a long-run equilibri

Question

Imagine a perfectly competitive market that is currently in a long-run equilibrium with price-$10, individual firm quantity set at 10 units, and 100 active firms. Scientific discoveries about the health benefits of this good lead to a permanent increase in demand for this good (but no changes in firm costs). Once the market is able to fully adjust, then compared to the original long-run equilibrium, the new long-run equilibrium will have O a higher price and more active firms O a lower price and fewer active firms O the same price, but more active firms the same price, but fewer active firms

Explanation / Answer

We know that entry and exit of the firms is totally free in case of the perfectly competitive market.

Now, in case there are scientific discoveries about the health benefits of this good, it will lead to a permanent increase in the demand for this good but at the same time no changes to the cost of the good.

Looking at the increasing demand for the good, there will be an entry of few new firms in the market which are attracted to increased demand for the good. Now, as an impact of this, there will be more active firms. Increase in demand is crowded out by an equivalent entry of the new firms in the market and as a result, the price keeps unchanged.

Thus, Option C or 3rd option is the correct answer.

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