Question

Use the figure below to answer the following questions. Price and cost dollars per unit) 10 Quantity (units) Figure 12.4.1 3) Refer to Figure 12.4.1, which shows the cost curves and marginal revenue curve of a firm in a perfectly competitive market. In the long run, market A) demand will increase. B) demand will decrease. C) supply will increase. D) supply will decrease. E) supply and market demand will decrease. 4) Refer to Figure 12.4.1 which shows the cost curves and marginal revenue curve of a firm in a perfectly competitive market. In the long run, A) firms that remain in the market will expand production. B) market demand will increase. C) market supply will increase. D) firms will enter the market. E) firms that remain in the market will reduce production.

Answer 1

3.

Correct option: (D) Supply will decrease

Reason: As per the given graph, perfectly competitive markets produce at the point P or MR line cuts MC curve. In this case, the P < ATC, which means the market is incurring losses. In the long run, this will induce many firms to reduce production or exit the industry, in order to avoid incurring losses. This will make economic profits to fall to 0.

4.

Correct option: (E) Firms that remain in the market will reduce production

Reason: As discussed above, owing to losses in the industry, existing firms will start reducing production so as to reduce losses and make them fall to zero in the long run.