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 stay the same; the market price will stay the same; marginal cost will stay the same.
(B) The number of firms will increase; the market price will decrease; marginal cost will decrease.
(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 increase.

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 stay the same; the market price will stay the same; marginal cost will stay the same.
(B) The number of firms will increase; the market price will decrease; marginal cost will decrease.
(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 increase.

Accepted Answer

∻Solution∻ ‖ a ⋮ Economic Profits in Perfect Competition: In the long run, economic profits in a perfectly competitive market lead to the entry of new firms. ‖ ‖ b ⋮ Market Price Adjustment: The entry of new firms increases supply, which leads to a decrease in the market price until firms earn normal profits. ‖ ‖ c ⋮ Decreasing Cost Industry: A decreasing cost industry is one where the industry's long-run supply curve slopes downward, meaning that as output increases, the marginal cost for firms decreases. ‖ ‖ d ⋮ Long-Run Equilibrium: In the long run, firms in a perfectly competitive market will adjust to a point where $P = MC = AC$, and economic profits are zero. ‖ ‖ e ⋮ Outcome for Decreasing Cost Industry: Given the industry is a decreasing cost industry, as firms enter and output increases, each firm's marginal cost will decrease. ‖ ∻Answer∻ ⚹ (B) The number of firms will increase; the market price will decrease; marginal cost will decrease. ⚹ ∻Key Concept∻ ⚹ Long-Run Equilibrium in Perfect Competition ⚹ ∻Explanation∻ ⚹ In a perfectly competitive decreasing cost industry, the long-run equilibrium is reached when economic profits are eliminated through the entry of new firms, which increases supply, decreases market price, and lowers marginal costs due to economies of scale. ⚹◊What impact does an increase in the number of firms have on market price in a perfectly competitive decreasing cost industry experiencing economic profits?⍭ Generate me a similar question◊

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