Question

Two dry cleaners in a small city have reached a Cournot equilibrium. What occurs in the long run when other firms enter the​ market? ​(Select all that apply​.)

A.The market price will be driven above the marginal cost and the firms will earn an economic profit.

B.The market price will be driven down to the average total​ cost, and the economic profit will approach zero.

C.The total industry output decreases and the market price increases.

D.The total industry output increases and the market price decreases.

Answer 1

Answer : Options B and D are the answer.

In long run if many firms enter into the market then the industry output level increase. Due to increase in output level the market supply increase. As a result, the price level fall continuously until it reaches to average total cost. As in long run the price level is equal to average total cost hence firms earn zero economic profit. Therefore, options B and D are correct.