If there is a decrease in demand for a product in a purely competitive industry, it results in an industry contraction that will end when the product price is
A)greater than its marginal cost.
B)equal to its marginal cost.
C)less than its marginal cost.
D)greater than its average cost.

Question

Quizplus · Accepted Answer

In a purely competitive industry, equilibrium is reached when the price of the product equals its marginal cost. This is because firms will continue to produce and enter the market as long as the price is above the marginal cost, and will exit or reduce production when the price is below the marginal cost. When there's a decrease in demand, the industry contracts until the price adjusts to equal the marginal cost, ensuring that only those firms that can produce at or below the market price remain in the industry.

If There Is a Decrease in Demand for a Product