Question

Refer to the graphs above of perfectly competitive firms. Which of the following statements is correct? 

In graph (IV) the firm is earning an economic loss. However, the firm will continue to operate in the short-run because price is greater than average variable costs. Therefore, the firm is covering average variable costs and reducing the overall burden of total fixed costs

 In graph (III) the firm is enjoying positive economic profits. Therefore, firms will enter the market and compete away the positive economic profits. This is due to the fact that prices will decline from the increase in supply.

 In graph (I) the firm is enjoying positive economic profits. Therefore, firms will enter the market and compete away the positive economic profits. This is due to the fact that prices will decrease from the decrease in demand. 

In graph (IV) the firm is earning an economic loss. Therefore, firms will enter the market and compete away the negative economic profits. This is due to the fact that prices will decline from the increase in supply. In the long-run, the the form depicted will shut down

 In graph(II) economic profits for the firm is 50. Therefore, firms will not have an incentive to enter or exit the market. However, in the long-run this form will exit the market because of an influx of new firms in the long-run.

Answer 1

In Graph (I) the firm is enjoying positive economic profits therefore, firms will enter the market and compete away the positive economic profits.This is due to the fact that price will decrease from the decrease in demand.

option(C)