Assume an increasing-cost perfectly competitive industry. Which of the following statements is true?

• A. Entry of new firms causes input prices to fall, reducing costs for all firms.
• B. As industry output increases, the long-run average cost curve shifts upward.
• C. The long-run supply curve for the industry is perfectly elastic.
• D. Firms in the industry experience constant returns to scale as output expands.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of an increasing-cost industry. In such an industry, as total industry output increases, the demand for inputs rises, which tends to increase input prices rather than decrease them.
2. Step 2: Analyze the effect of entry of new firms on input prices. Since input prices rise with increased demand, costs for all firms increase, so the statement that input prices fall is incorrect.
3. Step 3: Consider the shape of the long-run average cost (LRAC) curve. In an increasing-cost industry, the LRAC curve shifts upward as industry output expands because input prices increase, raising firms' costs.
4. Step 4: Evaluate the long-run supply curve. For an increasing-cost industry, the long-run supply curve is upward sloping, not perfectly elastic, because higher costs lead to higher prices needed to induce more output.
5. Step 5: Assess returns to scale. Increasing-cost industries typically do not exhibit constant returns to scale at the industry level because input price increases affect costs, so the assumption of constant returns to scale is not valid here.