The coffee industry is perfectly competitive. All firms in the coffee industry are producing an allocatively efficient quantity and are productively efficient.

Which of the following is most likely true based on this information?

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

Question

The coffee industry is perfectly competitive. All firms in the coffee industry are producing an allocatively efficient quantity and are productively efficient.

Which of the following is most likely true based on this information?

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

Accepted Answer

∻Solution∻ ‖ a ⋮ Allocative Efficiency: Allocative efficiency occurs when the quantity of output produced is such that the price (P) equals the marginal cost (MC) of production, i.e., $P = MC$. This ensures that resources are allocated in a way that maximizes consumer and producer surplus. ‖ ‖ b ⋮ Productive Efficiency: Productive efficiency is achieved when firms produce at the lowest point on their average total cost (ATC) curve, meaning they are minimizing the cost of production. ‖ ‖ c ⋮ Long-Run Equilibrium: In a perfectly competitive market, long-run equilibrium is achieved when firms are producing at a point where $P = MC = ATC$. This implies that firms are making zero economic profit, as any positive or negative economic profit would lead to entry or exit of firms, respectively, until profits are normalized. ‖ ‖ d ⋮ Implication: Given that all firms are producing an allocatively and productively efficient quantity, it indicates that the market is in long-run equilibrium. This is because firms are producing at the lowest cost and the price reflects the marginal cost, leading to zero economic profit. ‖ ∻Answer∻ ⚹ (B) The market is in long-run equilibrium. ⚹ ∻Key Concept∻ ⚹ Long-Run Equilibrium in Perfect Competition ⚹ ∻Explanation∻ ⚹ In a perfectly competitive market, long-run equilibrium is characterized by firms producing at a point where price equals marginal cost and average total cost, leading to zero economic profit. This ensures both allocative and productive efficiency. ⚹◊What factors would cause firms to exit the coffee industry if they are producing an allocatively efficient quantity and are productively efficient?⍭ Generate me a similar question◊

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