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Question
Macroeconomics
Posted 3 months ago

If the market for donuts is perfectly competitive and all firms are producing a quantity that generates no deadweight loss and the cost per unit is minimized, which of the following is most likely true?

Choose 1 answer:
(A) Firms are earning economic profits and more firms will enter this industry.
(B) The market supply will shift right
(c) The market is in long-run equilibrium.
(D) Firms are making economic losses and more firms will exit this industry.
(E) Firms will decrease their average total costs if they increase output
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Answer from Sia
Posted 3 months ago
Solution
a
Allocative Efficiency: In a perfectly competitive market, allocative efficiency occurs when the price equals the marginal cost (P=MCP = MC). This condition ensures that there is no deadweight loss
b
Productive Efficiency: Productive efficiency is achieved when firms produce at the lowest point on their average total cost curve (ATCATC), meaning they are minimizing the cost per unit
c
Long-run Equilibrium: In the long run, perfectly competitive firms earn zero economic profit, as any economic profits or losses would lead to entry or exit from the market until only normal profits remain. This is consistent with both allocative and productive efficiency
d
Economic Profits and Market Entry: If firms are earning economic profits, it would not be a characteristic of long-run equilibrium, as this would attract new firms to enter the market, shifting the supply curve to the right until profits are eliminated
e
Economic Losses and Market Exit: Similarly, if firms are making economic losses, this would lead to firms exiting the market, which is also not a characteristic of long-run equilibrium
f
Decreasing Average Total Costs: In the long run, firms cannot decrease their average total costs by increasing output, as they are already producing at the minimum point of their ATCATC curve
Answer
(C) The market is in long-run equilibrium.
Key Concept
Long-run Equilibrium in Perfect Competition
Explanation
In a perfectly competitive market, long-run equilibrium is characterized by firms producing where there is no deadweight loss and the cost per unit is minimized, which corresponds to the condition where P=MCP = MC and firms are producing at the minimum point of their ATCATC curve, earning zero economic profit.

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