1-When price exceeds average total cost in a competitive market, what change should we expect to...

1-When price exceeds average total cost in a competitive market, what change should we expect to see in the long run?

a.Firms will exit.

b.Firms will enter

c.Market demand will shift to the right.

2-Consider a competitive market with identical firms that is in long-run equilibrium. Which of the following statements captures the sequence of events from the short run to the long run after demand increases?

a.When demand increases, price rises in the short run, causing each firm to produce more and earn a profit. The profit induces entry of new firms into the market until price returns to its initial value and each firm earns zero profit.

b.When demand increases, price falls in the short run, causing each firm to produce less and incur economic losses. The losses induce exit of existing firms from the market until price returns to its initial value and each firm earns zero profit.

c.When demand increases, price rises in the short run, causing each firm to produce more and earn a profit. The price remains high and firms continue to earn profit.

d.Market demand will shift to the left.

Expert Solution

1. When price exceeds ATC, the firm is earning profits. Attracted by positive profits, new firms enter the market.

Answer-B

2.A is correct.

When demanded rise price rises. Producers earn profits and so new firms continue to enter until the supply rises so much that price is again back to its long long equilibrium level.

Rahul Sunny answered 2 years ago

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