The correct answer is option 1: Always true
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In a market with a fixed number of firms, a shift in the demand curve affects both price and quantity. However, the total quantity supplied is constrained by the fixed number of firms, limiting the overall impact on equilibrium quantity.
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In a market with free entry and exit, firms can enter or exit based on profit opportunities.
- If demand increases, new firms enter, leading to a significant increase in equilibrium quantity while price remains stable in the long run.
- If demand decreases, firms exit, leading to a major decline in equilibrium quantity, again with price stabilizing at the minimum average cost.
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Since entry and exit allow greater adjustments in equilibrium quantity compared to a market with fixed firms, the impact of a shift in demand is always more pronounced in such markets.
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