Assume that a competitive industry producing a normal good is in long-run equilibrium. If average consumer income decreases, which of the following changes will occur?

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First, set the context: the industry is in long-run equilibrium in a competitive market, and the good is normal. A decrease in average consumer income reduces overall demand for the good, shifting the market demand curve to the left. In the short run, the price tends to fall due to the reduced demand, and quantity supplied falls as producers respond to lower market-clearing price. In the long run, ongoing losses or reduced profits from the lower price lead some firms to exit, further reducing industry output until profits are driven back to zero at a new, lower equilibrium price and quantity. With this baseline, evaluate each option:

Option 1: Short-Run Price = DECREASE; Short-Run Industry Output = DECREASE; Movement of Firms = EXIT
- This aligns with the intuition above: a drop in income lowers demand, pulling price down in the short run, causing industry output to fall as firms respond to lower price signals, and exit of some firms as profits deteriorate in the short run.

Option 2: Short-Run Price = INCREASE; Short-Run Industry Output = INCREASE; Movement of Firms = ENTER
- An income decline would not induce a higher price or output in the short run; it shifts demand left, not right. Entering firms would occur if profits were rising or if there were positive expected profits, which is inconsistent with a demand shift left due to lower income.

Option 3: Short-Run Price = INCREASE; Short-Run Industry Output = DECREASE; Movement of Firms = EXIT
- Price increasing in the short run contradicts the expected effect of a drop in income reducing demand. A higher price would occur only if supply shifts left or demand shifts right, neither of which is caused by lower income.
- While output decreasing with a price increase could occur, the premise of lower income generally lowers both price and quantity in the short run, making this combination unlikely.

Option 4: Short-Run Price = DECREASE; Short-Run Industry Output = INCREASE; Movement of Firms = EXIT
- Price decreasing fits the demand shift, but industry output increasing in the short run is inconsistent: lower price typically reduces quantity supplied in the short run, and it would be unusual for output to rise when demand has fallen. Firm exit would accompany sustained losses, not necessarily a situation where output rises.

Option 5: Short-Run Price = DECREASE; Short-Run Industry Output = DECREASE; Movement of Firms = ENTER
- Price decrease is plausible, and short-run output can decrease. However, entering firms when demand has fallen due to lower income is unlikely, since new entrants respond to expected profits, which would be weak or negative in a depressed market. Entering would worsen excess supply if it occurred, contradicting the observed price signal.

Across the options, the combination most consistent with a fall in income causing a leftward shift in demand, with lower price and reduced output in the short run, and exit of some firms moving the industry toward a new equilibrium, is the one that links price decrease, output decrease, and firm exit as the immediate responses to weaker demand.

AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

Assume that a competitive industry producing a normal good is in long-run equilibrium. If average consumer income decreases, which of the following changes will occur?

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AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

Assume that a competitive industry producing a normal good is in long-run equilibrium. If average consumer income decreases, which of the following changes will occur?

View Explanation

Log in for full answers

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