Question

Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, and that the price of each candy cane is $0.10. Now suppose that the price of sugar rises, increasing the marginal and average total cost of producing candy canes by $0.05; there are no other changes in production costs. Based on the information given, we can conclude that once all the adjustments to long-run equilibrium are achieved, the price of candy canes will equal: five cents. ten cents. fifteen cents

Answer 1

Answer:

The price will increase to $0.15 or 15 cents.

Explanation:

In a perfect competition the firm operates at the level where it's price is equal to the marginal cost of production.

So, initially the firm will be operating at price level $0.10 but when there is an increase in the marginal cost of production by $0.05 due to increase in sugar prices, the candy cane producing  firms will adjust their price accordingly.

So, the price will also increase by the same amount and thus the new price level will be $0.15.