Consider a perfectly competitive market with identical firms and a downward-sloping market demand curve. Assume that the market is initially in a long-run (and short-run) equilibrium. Suppose the variable costs of production increase, which shifts up the marginal cost and average total cost curves to the same extent. In the long run, we would expect the price to _________ and the number of firms in the market to ___________.Group of answer choicesincrease; decreaseincrease; increasedecrease; decreasedecrease; increaseNone of the above
Question
Consider a perfectly competitive market with identical firms and a downward-sloping market demand curve. Assume that the market is initially in a long-run (and short-run) equilibrium. Suppose the variable costs of production increase, which shifts up the marginal cost and average total cost curves to the same extent. In the long run, we would expect the price to _________ and the number of firms in the market to ___________.Group of answer choicesincrease; decreaseincrease; increasedecrease; decreasedecrease; increaseNone of the above
Solution
In the long run, we would expect the price to increase and the number of firms in the market to decrease.
Here's why:
-
An increase in variable costs of production shifts the marginal cost and average total cost curves upward. This means that it is now more expensive for firms to produce goods.
-
In a perfectly competitive market, firms are price takers, meaning they have no control over the price of the goods they sell. The price is determined by the market.
-
In the short run, firms may continue to operate at a loss because they are unable to exit the market immediately due to sunk costs. However, in the long run, firms are able to adjust their production levels or exit the market entirely.
-
As firms exit the market due to increased costs and decreased profits, the supply of goods decreases. According to the law of supply and demand, when supply decreases and demand remains constant, the price of goods increases.
-
Therefore, in the long run, we would expect the price to increase due to decreased supply, and the number of firms in the market to decrease as firms exit the market.
Similar Questions
Consider a constant cost industry that is perfectly competitive and in which the demand curve is downward sloping. Further, starting from a long-run equilibrium, firms experience an improvement in technology that lowers the marginal cost and average total cost to the same extent. In the long run, we expect: [Tick all that apply]
Consider a constant-cost industry that is perfectly competitive and in which the demand curve is downward sloping. Further, starting from a long run equilibrium assume that firms experience an improvement in technology that lowers average total cost but does not change marginal cost. In the long run, we would expect:Group of answer choicesConsumer surplus to increase and producer surplus to remain unchanged.Consumer surplus to decrease and producer surplus to remain unchanged.Producer surplus to increase and consumer surplus to remain unchanged.Producer surplus to decrease and consumer surplus to remain unchanged.More information is required to answer this question.
Assume that all firms in a competitive industry have cost curves given by the following: TC = 128 +8q +2q2. Further, the market demand curve is given by: p = 72-2Q. In the long-run market equilibrium, profit for each firm equals:
If firms in a competitive market are making positive economic profits, you would expect firms to __________ the market, causing the market __________ curve to shift to the __________.Group of answer choicesenter; demand; leftleave; supply; leftenter; supply; rightenter; demand; rightenter; supply; left
Firms in long-run equilibrium in a perfectly competitive industry will produce at the low points of their average total cost curves becauseQuestion 2Select one:a.firms seek maximum profits and to do so they must choose to produce where average costs are minimized.b.firms maximize profits and free entry implies that maximum profits will be zero.c.free entry implies that long-run profits will be zero no matter how much each firm produces.d.firms in the industry desire to operate efficiently.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.