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 what will happen to the market supply curve in the long run?
A)It will stay at S3, but the quantity supplied will increase.
B)It will shift to S2.
C)It will shift to S1.
D)It will stay at S3, but the quantity supplied will decrease.

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 what will happen to the market supply curve in the long run?
A)It will stay at S3, but the quantity supplied will increase. 
B)It will shift to S2. 
C)It will shift to S1. 
D)It will stay at S3, but the quantity supplied will decrease.

Quizplus · Accepted Answer

If the market supply curve is S3, then the market price will be $10, which is less than the minimum of the average total cost curve. As a result, each firm in this market will earn an economic loss, prompting some firms to exit the market in the long run. Market supply will decrease until the remaining firms are earning zero economic profit. This occurs when the market price is $15 (the minimum of the average total cost curve). So the market supply curve will shift back to S2.

Assume That All Firms in This Industry Have Identical Cost