Refer to Figure 23.2 for a perfectly competitive firm.Given the current market price of $100,we expect to see
A)Firms exit from the industry,driving up the market price.
B)Firms enter the industry,driving up the market price.
C)No change in the number of firms in the industry and no change in the market price.
D)Firms enter the industry,driving down the market price.

Question

Refer to Figure 23.2 for a perfectly competitive firm.Given the current market price of $100,we expect to see
A)Firms exit from the industry,driving up the market price. 
B)Firms enter the industry,driving up the market price. 
C)No change in the number of firms in the industry and no change in the market price. 
D)Firms enter the industry,driving down the market price.

Quizplus · Accepted Answer

According to the graph, at a price of $100, the marginal cost for the firm is higher than the price, resulting in negative economic profit. However, if new firms enter the industry, the market supply will increase, driving down the market price. This will continue until the price falls to the point where the marginal cost for the firm is equal to the price, resulting in zero economic profit. Therefore, firms will enter the industry, driving down the market price.