In perfect competition, if the market price of the product is initially higher than the minimum average total cost faced by the firms, thenMultiple Choicesome firms will exit the industry and the industry supply will decrease.other firms will enter the industry and the industry supply will increase.some firms will exit the industry and the industry supply will increase.other firms will enter the industry and the industry supply will decrease.
Question
In perfect competition, if the market price of the product is initially higher than the minimum average total cost faced by the firms, thenMultiple Choicesome firms will exit the industry and the industry supply will decrease.other firms will enter the industry and the industry supply will increase.some firms will exit the industry and the industry supply will increase.other firms will enter the industry and the industry supply will decrease.
Solution
The correct answer is: other firms will enter the industry and the industry supply will increase.
Here's why:
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In perfect competition, all firms are price takers. This means they take the market price as given and cannot influence it.
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If the market price is higher than the minimum average total cost, firms are making a profit because they're able to cover all their costs and have some money left over.
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This profit opportunity will attract other firms to enter the industry, because they also want to make a profit.
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As more firms enter the industry, the supply of the product in the industry will increase. This is because more firms are now producing and selling the product.
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Over time, as supply increases, the market price will fall (due to the law of supply and demand). This will continue until the market price equals the minimum average total cost, at which point firms are just breaking even, and there's no incentive for more firms to enter or for existing firms to exit.
Similar Questions
If a perfectly competitive firm is facing a situation where the price of its product is lower than the average total cost, which of the following statements is true?Multiple ChoiceOther firms will want to enter the industry because of the economic profits generated by the firm.The firm may be earning some accounting profits, but less than what it could earn elsewhere.The firm is generating a loss, and if things are not expected to improve the firm will leave the industry.The firm may earn economic profits in the long run if it expands its plant in order to exploit economies of scale.
Refer to Figure 17-6. In response to the situation represented by the figure, we would expectGroup of answer choicesnew firms to enter the market.the demand for this firm's product to decrease, assuming this firm does not exit.this firm's profit to remain the same.some of the firms that are currently in the market to exit.
If firms in a monopolistically competitive industry are making losses:Group of answer choicesthey will likely be subject to regulationthey ought to form a cartelnew firms will enter the marketsome firms will exit the market
In a perfectly competitive market, what happens when the average total cost is greater than the market price?The firm shuts down immediatelyThe firm incurs an economic lossThe firm breaks evenThe firm earns an economic profit
In monopolistically competitive markets, economic losses:Group of answer choicessignal new firms to enter, which shifts the demand curve of the remaining firms to the left.signal new firms to enter, which shifts the supply curve of the remaining firms to the left.signal new firms to enter, which shifts the demand curve of the remaining firms downwards.signal some incumbent firms to exit, which shifts the supply curve of the remaining firms upwards.signal some incumbent firms to exit, which shifts the demand curve of the remaining firms to the right.
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