If there is an increase in market demand in a perfectly competitive market, then in the short run:

• A. Firms will exit the market due to lower profits.
• B. The equilibrium price will rise and firms will increase output.
• C. The equilibrium price will remain unchanged and firms will maintain current output.
• D. The equilibrium price will fall and firms will decrease output.

Answer: (B)

Verified step by step guidance

1. Understand the characteristics of a perfectly competitive market: many firms, identical products, and free entry and exit in the long run.
2. Recognize that an increase in market demand shifts the market demand curve to the right, leading to a higher quantity demanded at each price.
3. In the short run, the market supply curve is fixed because firms cannot enter or exit immediately, so the increased demand causes the equilibrium price to rise.
4. With a higher equilibrium price, individual firms see an increase in the price they receive for their product, which increases their marginal revenue.
5. Firms respond to the higher price by increasing their output to maximize profits, moving along their short-run supply curve.