Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If the market supply curve is given by S3, then we would expect firms to:
A)exit the market in the long run.
B)enter the market in the long run.
C)neither exit nor enter the market in the long run.
D)shut down in the short run.

Question

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive.  If the market supply curve is given by S3, then we would expect firms to:
A)exit the market in the long run. 
B)enter the market in the long run. 
C)neither exit nor enter the market in the long run. 
D)shut down in the short run.

Quizplus · Accepted Answer

If S3 is the market supply curve, then the short-run equilibrium price will be $10 per gallon.  Since $10 is below the minimum of the average total cost curve, firms in this market will earn an economic loss, and in the long run some firms will exit the market. Note that firms will not shut down in the short run since $10 is greater than the minimum of the average variable cost curve.

Assume That All Firms in This Industry Have Identical Cost