Table 14-2
The market for Whizzly Jigs consists of many identical firms, each with the cost structure below. Suppose the current market price is $2.

-Refer to Table 14-2. Suppose the current market price is $2. Which of the following is likely to occur?

Question

Table 14-2
The market for Whizzly Jigs consists of many identical firms, each with the cost structure below. Suppose the current market price is $2.
  
-Refer to Table 14-2. Suppose the current market price is $2. Which of the following is likely to occur?

Quizplus · Accepted Answer

At a market price of $2, firms will not be able to cover their average variable cost (AVC) which is $2.50. Hence, they will be making losses in the short-run and may shut-down. However, if the price stays at $2 in the long-run, firms will exit the industry as they cannot cover their average total cost (ATC) which is $3. In the long-run, the number of firms in the industry will reduce to the point where economic profit is zero, which is at the minimum point of the long-run average cost (LRAC) curve. Therefore, option B is the most appropriate choice.

Table 14-2 The Market for Whizzly Jigs Consists of Many Identical Firms