Question

Figure 14-7 Price Price Supplyo MC Supply, ATC P1 Demandi Demando Q,Q2 Quantity Qr1QyQ Quantity

Refer to Figure 14-7. Assume that the market starts in equilibrium at point A in panel (b). An increase in demand from Demand₀ to Demand₁ will result in

a) an eventual increase in the number of firms in the market and a new long-run equilibrium at point D.

  

b) rising prices and falling profits for existing firms in the market.

   

c) prices and falling profits for existing firms in the market.

  

d) a new market equilibrium at point B in the short run, before new firms enter the market.

Answer 1

Option d)

At point A, market is at break even, as the demand increases, the price increases which increases profits for the existing firms reaching new equilibrium at point B.  So looking at the profits new firms enter into market  after some point of time.