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Question
Microeconomics
Posted 2 months ago

The coffee industry is perfectly competitive. All firms in the coffee industry are producing an allocatively efficient quantity and are productively efficient.

Which of the following is most likely true based on this information?
Choose 1 answer:
(A) The market is in long-run equilibrium.
(B) Firms are earning economic profits and more firms will enter this industry.
(C) Firms will decrease their average total costs if they increase output
(D) The market supply will shift right
(E) Firms are making economic losses and more firms will exit this industry.
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Answer from Sia
Posted 2 months ago
Solution
a
Long-Run Equilibrium: In a perfectly competitive market, long-run equilibrium occurs when firms are producing at the minimum point of their average total cost (ATC) curves, and no economic profits or losses are being made. This is because any economic profits would attract new firms into the market, increasing supply and driving prices down, while economic losses would cause firms to exit the market, decreasing supply and driving prices up
b
Allocative Efficiency: Allocative efficiency occurs when the price of the good equals the marginal cost (P = MC). In a perfectly competitive market, firms produce where P = MC, ensuring that the quantity of the good produced is socially optimal
c
Productive Efficiency: Productive efficiency occurs when firms produce at the lowest point on their average total cost (ATC) curve. In the long run, perfectly competitive firms achieve productive efficiency because they cannot sustain economic profits or losses
d
Implications: Given that the coffee industry is perfectly competitive and firms are producing an allocatively efficient quantity and are productively efficient, it implies that the market is in long-run equilibrium. This is because only in long-run equilibrium do firms produce at the lowest point of their ATC curve (productive efficiency) and where P = MC (allocative efficiency)
Answer
A. 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 achieved when firms are both allocatively and productively efficient, meaning they produce at the lowest point of their ATC curve and where P = MC. This ensures no economic profits or losses, indicating the market is in long-run equilibrium.

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