The correct answer is Option 3: Constant
- In a perfectly competitive market with free entry and exit of firms, firms produce at minimum average cost in the long run.
- If the demand curve shifts to the right (increase in demand), in the short run, the price may increase due to temporary shortages.
- However, in the long run, new firms will enter the market, increasing supply until price returns to the original equilibrium level, which equals the minimum average cost.
- As a result, the equilibrium price remains constant, but the equilibrium quantity increases.
|
