Perfectly competitive firms are earning economic profits at a market price of $5 and an average total cost of $4. If new firms enter and do not affect the cost for all firms, the market price will ______until it reaches______ .

Question

Quizplus · Accepted Answer

With the entry of new firms, the supply in the market will increase, leading to a decrease in the market price. This is because there will be more firms producing at a lower cost than the existing firms, and the increased competition will force prices down. Eventually, the market price will fall to the point where it is equal to the average total cost of all firms, which in this case is $4. So the market price will fall until it reaches $4.

Perfectly Competitive Firms Are Earning Economic Profits at a Market