Suppose that a competitive firm finds that in its short-run equilibrium situation, its marginal cost is higher than its average total cost. If things are not expected to change and there are constant returns to scale, then the firm will exit the industry in the long run.

Question

Quizplus · Accepted Answer

In a competitive market, if a firm's marginal cost is higher than its average total cost, it means the firm is making a profit (since price equals marginal cost in competitive equilibrium, and price would be above average total cost). Firms typically exit an industry when they are unable to cover their average total costs in the long run, not when they are profitable.

Suppose That a Competitive Firm Finds That in Its Short-Run