If shark repellent is produced in a perfectly competitive market and its long-run supply curve is horizontal, which of the following must be true?

Choose 1 answer:
(A) An increase in demand in this market increases prices in the longrun.
(B) The marginal cost curve for a firm in this industry decreases as more firms enter.
(c) When more firms enter this market, each firm's average total cost curve increases.
(D) When more firms enter this market, input prices increase.
(E) When more firms enter this market, input prices don't change.

Question

If shark repellent is produced in a perfectly competitive market and its long-run supply curve is horizontal, which of the following must be true?

Choose 1 answer:
(A) An increase in demand in this market increases prices in the longrun.
(B) The marginal cost curve for a firm in this industry decreases as more firms enter.
(c) When more firms enter this market, each firm's average total cost curve increases.
(D) When more firms enter this market, input prices increase.
(E) When more firms enter this market, input prices don't change.

Accepted Answer

∻Solution∻ ‖ a ⋮ Horizontal Long-Run Supply Curve: In a perfectly competitive market, a horizontal long-run supply curve implies that the industry is in constant returns to scale. This means that the long-run average total cost (LRATC) does not change with the level of output. ‖ ‖ b ⋮ Impact of Demand Increase: If demand increases in such a market, the short-run effect may be an increase in prices, but in the long run, the entry of new firms will drive the price back to the original equilibrium, due to the horizontal supply curve. ‖ ‖ c ⋮ Marginal Cost Curve: The marginal cost curve for a firm does not change as more firms enter the market. It is determined by the firm's technology and input prices. ‖ ‖ d ⋮ Average Total Cost Curve: Each firm's average total cost curve does not increase when more firms enter the market. It remains at the minimum point of the LRATC due to constant returns to scale. ‖ ‖ e ⋮ Input Prices: In a perfectly competitive market with a horizontal long-run supply curve, input prices do not change as more firms enter the market. This is because the supply of inputs is perfectly elastic at the prevailing price. ‖ ∻Answer∻ ⚹ (E) When more firms enter this market, input prices don't change. ⚹ ∻Key Concept∻ ⚹ Horizontal Long-Run Supply Curve in Perfect Competition ⚹ ∻Explanation∻ ⚹ In a perfectly competitive market with a horizontal long-run supply curve, input prices remain constant even as new firms enter the market, because the supply of inputs is perfectly elastic at the market price. ⚹◊What impact does increased competition from more firms entering the market have on input prices in the long run?⍭ Generate me a similar question◊

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