Typical firms in a perfectly competitive decreasing cost industry are currently earning economic profits.

What will happen to the number of firms, the market price, and each firm's marginal cost in the long run?

Choose 1 answer:
(A) The number of firms will increase; the market price will decrease; marginal cost will increase.
(B) The number of firms will stay the same; the market price will stay the same; marginal cost will stay the same.
(C) The number of firms will decrease; the market price will increase; marginal cost will shift to the right.
(D) The number of firms will increase; the market price will decrease; marginal cost will decrease.

Question

Typical firms in a perfectly competitive decreasing cost industry are currently earning economic profits.

What will happen to the number of firms, the market price, and each firm's marginal cost in the long run?

Choose 1 answer:
(A) The number of firms will increase; the market price will decrease; marginal cost will increase.
(B) The number of firms will stay the same; the market price will stay the same; marginal cost will stay the same.
(C) The number of firms will decrease; the market price will increase; marginal cost will shift to the right.
(D) The number of firms will increase; the market price will decrease; marginal cost will decrease.

Accepted Answer

∻Solution∻ ‖ a ⋮ Number of Firms: In a perfectly competitive decreasing cost industry, when firms are earning economic profits, new firms will enter the market. This is because the presence of economic profits signals that there are opportunities for profit, attracting new firms. ‖ ‖ b ⋮ Market Price: As new firms enter the market, the supply of the product increases. According to the law of supply and demand, an increase in supply, with demand remaining constant, will lead to a decrease in the market price. ‖ ‖ c ⋮ Marginal Cost: In a decreasing cost industry, as the industry expands and more firms enter, the costs of production decrease due to economies of scale. This means that the marginal cost for each firm will decrease in the long run. ‖ ∻Answer∻ ⚹ (D) The number of firms will increase; the market price will decrease; marginal cost will decrease. ⚹ ∻Key Concept∻ ⚹ Perfectly Competitive Decreasing Cost Industry ⚹ ∻Explanation∻ ⚹ In a perfectly competitive decreasing cost industry, the entry of new firms due to economic profits leads to an increase in supply, which decreases the market price. Additionally, economies of scale result in a decrease in marginal cost for each firm. ⚹◊What impact would increased competition have on the equilibrium market price in a perfectly competitive decreasing cost industry according to Microeconomic theory⍭ Generate me a similar question◊

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