In the long run, free entry drives the market price to the minimum level of ________, and each firm supplies a quantity equal to its ____________.

Question

Quizplus · Accepted Answer

Free entry drives firms to produce the output level at which they minimize their long-run average cost. This is because firms that are unable to produce at the minimum efficient scale will exit the industry due to lack of profitability, and firms that are able to produce at a lower cost will enter the industry. Each firm will supply a quantity equal to its minimum efficient scale. Therefore, the market price will be the minimum level of long-run average cost, and firms will produce at their minimum efficient scale. Free entry drives the market price to the minimum level of long-run average cost, which is the minimum cost per unit of output that a firm would incur if it were to produce the same quantity of output over the long-run. Each firm supplies a quantity equal to its minimum efficient scale, which is the lowest level of output at which a firm can minimize its long-run average total cost. Therefore, choice C is the correct answer.

In the Long Run, Free Entry Drives the Market Price