The market for happy face stickers is perfectly competitive, and the market price for these stickers is greater than the average total cost (ATC) of a typical firm.

Which of the following is true about this market?
Choose 1 answer:
(A) Firms are charging prices higher than the marginal cost of producing stickers.
(B) Firms are producing a cost-efficient quantity
(C) Firms are earning positive economic profits and more firms will enter this industry.
(D) Firms are producing an allocatively inefficient quantity and firms will exit this industry.
(E) Firms are earning zero economic profits and the market is in longrun equilibrium

Question

The market for happy face stickers is perfectly competitive, and the market price for these stickers is greater than the average total cost (ATC) of a typical firm.

Which of the following is true about this market?
Choose 1 answer:
(A) Firms are charging prices higher than the marginal cost of producing stickers.
(B) Firms are producing a cost-efficient quantity
(C) Firms are earning positive economic profits and more firms will enter this industry.
(D) Firms are producing an allocatively inefficient quantity and firms will exit this industry.
(E) Firms are earning zero economic profits and the market is in longrun equilibrium

Accepted Answer

∻Solution∻ ‖ a ⋮ Profit Maximization Rule: In a perfectly competitive market, a firm maximizes profit by producing the quantity of output where marginal cost (MC) equals market price (P), since P = MR (marginal revenue) in perfect competition. ‖ ‖ b ⋮ Market Power Definition: Market power is the ability of a firm to influence the price of its product or the terms of its sale. In a perfectly competitive market, individual firms have no market power because products are homogeneous and firms are price takers. ‖ ‖ c ⋮ Normal Economic Profits: Earning normal economic profits means that a firm is covering all its opportunity costs. In the long run, firms in a perfectly competitive market earn zero economic profits due to free entry and exit of firms. ‖ ‖ d ⋮ Conditions for Profit-Maximizing Quantity: For a firm in a perfectly competitive market to choose its profit-maximizing quantity, the following must be true: P = MC, P ≥ AVC (average variable cost), and there are no barriers to entry or exit in the market. ‖ ‖ e ⋮ Analysis of Multiple-Choice Question: Given that the market price is greater than ATC, firms are currently earning positive economic profits. This will attract new firms into the market, increasing supply and driving the price down until firms earn zero economic profits in the long run. ‖ ∻Answer∻ ⚹ (C) Firms are earning positive economic profits and more firms will enter this industry. ⚹ ∻Key Concept∻ ⚹ Positive Economic Profits in Perfect Competition ⚹ ∻Explanation∻ ⚹ In a perfectly competitive market, if firms are earning positive economic profits, it indicates that the market price is above the average total cost, leading to new firms entering the market until economic profits are driven to zero. ⚹◊What effect would an increase in the market price of the happy face stickers have on the quantity supplied by firms in the perfectly competitive market?⍭ Generate me a similar question◊

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