In Figure 23.3, diagram "a" presents the cost curves that are relevant to a firm's production decision, and diagram "b" shows the market demand and supply curves for the market. Use both diagrams to answer the following question: In Figure 23.3, at a price of p₂ in the long run A) Firms will enter the market. B) Economic profits equal zero. C) Firms will exit the market. D) P = AVC.

Question

Quizplus · Accepted Answer

At a price of p₂ in the long run, economic profits equal zero. This is because the price is equal to both the average total cost (ATC) and the minimum point of the average variable cost (AVC) curve. At this point, firms are earning enough revenue to cover all of their costs, including normal profits, but not enough to earn economic profits. Firms will continue to produce at this level and there will be no incentive for new firms to enter the market or for existing firms to exit. Therefore, choice B is the correct answer.