If all firms in a competitive industry experience an increase in marginal costs,then which of the following is most likely to occur in the short run?
A) Firms will enter the market.
B) Existing firms will expand production.
C) Firms will shutdown.
D) Firms will exit the market.

Question

Quizplus · Accepted Answer

An increase in marginal costs means that it costs firms more to produce each additional unit of output. In the short run, firms may not be able to adjust their inputs to lower their marginal costs. As a result, they will face lower profits or even losses. If the price they receive for their output cannot cover their average variable costs, they will shut down temporarily. Therefore, option C is the most likely outcome. Options A and B are unlikely because entering or expanding in a market where all firms are experiencing higher costs would not be profitable. Option D is also unlikely because firms are more likely to shut down temporarily in the short run rather than exit the market entirely.

If All Firms in a Competitive Industry Experience an Increase