Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Firms exiting the market due to losses will lead to a decrease in overall supply.
B
The market price will always return to its original level regardless of changes in production costs.
C
Increased number of firms in the market automatically results in a lower price.
D
Long-run equilibrium output of a typical firm remains unchanged if costs do not vary.
E
Economic profits in the long run attract new firms, shifting the supply curve to the right.
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive market, long-run equilibrium means that all firms in the market are making zero economic profit. This happens because, in the long run, if firms are making profits, new firms will enter the market, increasing supply and pushing prices down until profits are eliminated. Conversely, if firms are making losses, some will exit, reducing supply and pushing prices up until remaining firms can break even. For example, if a bakery in a town is making a lot of money, new bakeries will open, and soon the increased competition will lower the prices and profits for everyone. In this way, the market self-adjusts to find a balance where firms are neither gaining nor losing money in the long run.
Detailed Explanation
In a perfectly competitive market, long-run adjustments depend on changes in costs and profits. Other options are incorrect because The idea here is that losing firms decrease supply; This suggests prices stay the same no matter what.
Key Concepts
Long-Run Equilibrium Adjustments
Perfect Competition
Market Supply and Demand
Topic
Long-Run Equilibrium Adjustments
Difficulty
medium level question
Cognitive Level
understand
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