Suppose a typical firm in a competitive industry has the following data in the short run: price = $6; output = 100 units; ATC = $8; AVC = $7.What will likely happen in the long run?

Question

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In the short run, the firm is producing at a loss since the price ($6) is lower than the average total cost ($8) of producing each unit. However, in the long run, firms have the ability to enter or exit the industry. If firms continue to operate at a loss, they will eventually exit the industry. As firms exit, the supply of the product decreases, causing the price to rise. At some point, the price will rise to a level where firms can earn a normal rate of return, and new firms will enter the industry. However, in this scenario, the firm is producing at a loss in the short run, so it is likely that firms will exit the industry in the long run, leading to a contraction of the industry.

Suppose a Typical Firm in a Competitive Industry Has the Following