Question

Question. Which of the following is true in a purely competitive, price-taker market with low barriers to entry?

Multiple Choice

A. In the long run, firms will produce the quantity of output that minimizes per unit costs (ATC) of production.

B. If economic profits are present in the short run, new firms will enter the industry, driving down prices until the industry returns to zero economic profits.

C. Firms produce identical products.

D. All of the above statements are true.

Answer 1

ANS=D=ALL THE STATEMENTS ARE CORRECT

In the long-term, producers can leave/ enter a purely competitive industry effortlessly. Perfect competition also presumes that producers & resources can be effortlessly reassigned in reaction to demand. Thus, suppose economic profits are being obtained by the producers in the industry, then more producers will like to enter , & in doing so theywill lessen the market price to the equilibrium quantity & price level which permits just normal profits. If the producers are facing losses, then few producers will like to leave the industry, lessening the market supply, & thereby raising the price level, which will permit the prevailing producers to gain a normal profit. The long-term market price is equivalent to the minimum ATC of manufacturing the item. And because the firms will produce till MC = market price, the long-term equilibrium condition in a purely competitive industry can be recapped as:

ATC = MC = Market Price