Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Prices will eventually stabilize at the original level after firms exit.
B
The market will permanently adjust to a higher price due to reduced competition.
C
Firms will continue to operate at a loss until they can raise prices.
D
The number of firms will decrease, but prices will remain lower than the original level.
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive market, when demand decreases, the price of the product falls. This lower price means that some firms may not be able to cover their costs, leading them to exit the market. As firms leave, the overall supply in the market decreases, which helps to raise the price back up. Eventually, the market reaches a new long-run equilibrium where the remaining firms can cover their costs, but at a lower level of output than before. For example, if a market for oranges sees a drop in demand, some orange growers might stop farming, leading to fewer oranges in the market and a stabilization of prices at a new, lower level.
Detailed Explanation
When demand decreases, some firms will leave the market. Other options are incorrect because Some might think prices will go up because there are fewer firms; It's a common belief that firms will keep losing money and wait to raise prices.
Key Concepts
Long-Run Equilibrium Adjustments
Perfect Competition
Market Supply and Demand Dynamics
Topic
Long-Run Equilibrium Adjustments
Difficulty
hard level question
Cognitive Level
understand
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