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Moderate

Perfect Competition: SR Impact on Profit of Cost of Cotton

APMICR-4YNLEV

Cotton is an input in the production of denim, which is used to produce blue jeans. If the market for blue jeans is perfectly competitive and currently in long-run equilibrium, which of the following correctly describes the short-run impact on a firm if it is forced to pay higher cotton prices because of a poor growing season?

A

Profits will decrease because the ATC curve will rise.

B

Profits will increase because the ATC curve will fall.

C

Profits will remain unchanged because marginal costs will not change.

D

Profits will decrease because average variable costs will fall.

E

Profits will decrease because average fixed costs will rise.