Sia
Question
Microeconomics
Posted 9 months ago
Glasses, Inc. is a typical firm producing drinking glasses in a perfectly competitive industry. Like other firms in this industry, it's currently making negative economic profits.
What will happen to the number of firms in the market and the price of this good when this industry returns to long-run equilibrium?
Choose 1 answer:
(A) the number of firms decreases; price decreases
(B) the number of firms increases; price decreases
(C) The number of firms increases; price doesn't change
(D) The number of firms doesn't change; price increases
(E) the number of firms decreases; price increases
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Answer from Sia
Posted 9 months ago
Solution
a
Negative Economic Profits: When firms in a perfectly competitive industry experience negative economic profits, it indicates that the price is below the average total cost (ATC). This situation is unsustainable in the long run
b
Exit of Firms: In response to negative economic profits, some firms will exit the market. This reduces the overall supply of the good in the market
c
Price Adjustment: As firms exit, the supply curve shifts to the left, leading to an increase in the market price until it reaches the point where firms are making zero economic profit (normal profit)
d
Long-Run Equilibrium: In the long run, the industry will reach a new equilibrium where the remaining firms are making zero economic profit, and the price will be equal to the minimum point of the ATC
Answer
(E) the number of firms decreases; price increases
Key Concept
Long-Run Equilibrium in Perfect Competition
Explanation
In a perfectly competitive market, negative economic profits lead to the exit of firms, which decreases the supply and increases the price until firms make zero economic profit in the long run.
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