Question

Assume the vitamin industry is perfectly competitive. When a new medical study shows that taking vitamins improves both the quality and length of​ life, demand for vitamins increases dramatically. As a​ result, vitamin​ producers' profits will:

A. decrease in the short-run but become positive in the long-run
B. remain unchanged in both the short-run and the long-run
C. increase in the short-run but fall to zero in the long-run
D. increase in the short-run and in the long-run

Answer 1

C. increase in the short-run but fall to zero in the long-run

Step-by-step explanation:

A perfectly competitive industry is characterised by many buyers and sellers of homogenous goods and services.

There are no barriers to entry or exit of firms. Firms are price takers. Market prices are set by the forces of demand and supply.

As a result of increase in demand, more quantities of the vitamins would be bought and producers profit would increase in the short run. Because, there are no barriers to entry or exit of firms, new firms would enter into the industry in the long run, driving economic profits to zero.

Due to no barriers to entry or exit of firms, in the long run, firms in a perfect competition earn zero economic profit.

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