Sia
Question
Macroeconomics
Posted 7 months ago
Glasses, Inc. is a typical firm producing drinking glasses in a perfectly competitive industry. Like other firms in this industry, it's currently making negative economic profits.
What will happen to the number of firms in the market and the price of this good when this industry returns to long-run equilibrium?
Choose 1 answer:
(A) The number of firms doesn't change; price increases
(B) The number of firms increases; price doesn't change
(C) the number of firms decreases; price decreases
(D) the number of firms decreases; price increases
(E) the number of firms increases; price decreases
Sign in to unlock the answer
Answer from Sia
Posted 7 months ago
Solution
a
Perfect Competition and Long-Run Equilibrium: In a perfectly competitive market, firms can enter and exit the market freely. If firms are making negative economic profits, it indicates that the price is below the average total cost (ATC). In the long run, this situation leads to firms exiting the market
b
Market Adjustment: As firms exit the market, the supply decreases, which increases the price of the good until firms are making zero economic profit, which is the condition for long-run equilibrium in a perfectly competitive market
c
Long-Run Equilibrium Outcome: At long-run equilibrium, firms earn zero economic profit, meaning that price equals the minimum point of the ATC curve. The number of firms in the market adjusts until all firms are making zero economic profit
Answer
(C) the number of firms decreases; price decreases
Key Concept
Long-Run Equilibrium in Perfect Competition
Explanation
In the long run, a perfectly competitive industry will see an adjustment in the number of firms and price until firms make zero economic profit, which may involve firms exiting the market and a decrease in price if they are initially making negative economic profits.
Not the question you are looking for? Ask here!
Enter question by text
Enter question by image
Unlock Smarter Learning with AskSia Super!
Join Super, our all-in-one AI solution that can greatly improve your learning efficiency.
30% higher accuracy than GPT-4o
Entire learning journey support
The most student-friendly features
Study Other Question