Suppose the paper industry is in long-run competitive equilibrium and the demand for paper increases. If the industry has external diseconomies of scale, what will happen to the price of paper in the long run?
What will be an ideal response?
The price of paper will rise. First, the increase in demand will push the price up. This will lead to positive profits in the paper industry and new firms will enter. Because the industry has external diseconomies of scale, as new firms enter, the long-run average cost curves of firms will shift up. The new long-run price of paper will be at the minimum point of the new long-run average cost curve.
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