Which of the following is most likely if all firms in a perfectly competitive market produce a quantity that is both allocatively and productively efficient?

Choose 1 answer:
(A) Firms are making economic losses and more firms will exit this industry.
(B) Firms will decrease their average total costs if they increase output
(C) The market supply will shift right
(D) Firms are earning economic profits and more firms will enter this industry.
(E) The market is in long-run equilibrium.

Question

Which of the following is most likely if all firms in a perfectly competitive market produce a quantity that is both allocatively and productively efficient?

Choose 1 answer:
(A) Firms are making economic losses and more firms will exit this industry.
(B) Firms will decrease their average total costs if they increase output
(C) The market supply will shift right
(D) Firms are earning economic profits and more firms will enter this industry.
(E) The market is in long-run equilibrium.

Accepted Answer

∻Solution∻ ‖ a ⋮ Allocative and Productive Efficiency: In a perfectly competitive market, allocative efficiency occurs when the price of the good equals the marginal cost of production ($P = MC$), and productive efficiency occurs when firms produce at the lowest point on their average total cost curve ($ATC$). ‖ ‖ b ⋮ Long-Run Equilibrium: In the long run, firms in a perfectly competitive market will earn zero economic profit, as any economic profit would attract new firms into the market, shifting the supply curve to the right and driving prices down until only normal profit is earned. ‖ ∻Answer∻ ⚹ (E) The market is in long-run equilibrium. ⚹ ∻Key Concept∻ ⚹ Long-Run Equilibrium in Perfect Competition ⚹ ∻Explanation∻ ⚹ In a perfectly competitive market, if all firms are producing a quantity that is both allocatively and productively efficient, the market must be in long-run equilibrium. This is because, in the long run, firms will enter or exit the market until only normal profits are made, ensuring that price equals both marginal cost and the minimum average total cost. ⚹◊What factors would cause firms in a perfectly competitive market to earn economic profits and attract more firms to enter the industry?⍭ Generate me a similar question◊

Sia