Which of the following statements are true about a competitive price-searcher market? Firms are not price...

Which of the following statements are true about a competitive price-searcher market?

Firms are not price takers.

Price equals average total cost in the long run.

Firms earn positive profit in the long run.

Firms are price takers.

Solutions

Expert Solution

Solution-

Which of the following statements are true about a competitive price-searcher market?

The correct answers are

A. Firms are not price takers.

B. Price equals average total cost in the long run.

Reason-

Competitive price searcher markets are characterized by differentiated product offerings among firms and low entry barriers. Differentiated products imply that each firm faces a downwardsloping demand curve, so that firms are not price takers but price searchers. Low entry barriers imply that such markets are competitive. That is, the profit of each firm is driven to zero in the long run as the demand for each firm's product adjusts with the entry and exit of other firms until price equals average total cost. Additionally, a downwardsloping demand curve entails that price exceeds marginal revenue, because as a firm expands output, prices of units previously sold at higher prices must fall.

Rahul Sunny answered 1 year ago

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