CFA Practice Question

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CFA Practice Question

Assume that a perfectly competitive industry is in long-run equilibrium. If demand increases, which of the following will occur?

I. Market price will increase.
II. Firms will produce more output.
III. Firms will increase their profits.
IV. The industry will not be in long-run equilibrium.
Correct Answer: I, II, III and IV

An increase in demand increases price, and thus the output at which price equals marginal cost will be greater. Firms expand output and increase profits, but the industry is not in long-run equilibrium, because given enough time, new firms may wish to enter the market, attracted by higher profits.

User Contributed Comments 5

User Comment
choas69 very good question.
xemex131 the demand curve for a perfectly competitive market is a horizontal line, increase in demand cannot lead to a price increase
abinavas I am confused now with the Market Price Increase in Perfect Competition? Insights, please?
sshetty2 The horizontal demand curve shifts upward due to an increase in demand meaning that the price on the y axis goes up
EEEEvia I thought the price will not be affected
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