Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It raises the average production costs for all firms, leading to higher prices.
B
It lowers production costs due to increased competition, reducing prices.
C
It has no effect on production costs, maintaining equilibrium prices.
D
It results in a surplus of goods, driving prices down.
Understanding the Answer
Let's break down why this is correct
Answer
In an increasing cost industry, new firms entering the market usually lead to higher costs for all producers. This happens because as more firms try to produce goods, they use up resources that become scarcer, making them more expensive. As a result, the supply curve shifts to the left, which means that the quantity of goods available at each price level decreases. For example, if a new bakery opens in a town, it might drive up the price of flour, making it costlier for all bakeries to produce bread. Consequently, the overall market equilibrium price rises, and the quantity of goods sold may decrease until a new balance is reached.
Detailed Explanation
When new firms enter an increasing cost industry, they compete for resources. Other options are incorrect because Some might think that more firms mean lower costs due to competition; It's a common belief that new firms don't change costs.
Key Concepts
Increasing Cost Industries
Market Equilibrium
Supply and Demand Dynamics
Topic
Increasing Cost Industries
Difficulty
hard level question
Cognitive Level
understand
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