If the market price in a price-taking industry was currently above the average total cost of production for firms in the industry,
A) firms in the industry would earn short-run economic profits that would be offset by long-run economic losses.
B) new firms would enter the industry, which would drive price down to the average total cost of production in the long run.
C) firms in the industry would earn positive economic profits in the long run.
D) most firms in the industry would shut down in the long run.

Question

Quizplus · Accepted Answer

In a price-taking industry, firms are unable to influence the market price and must accept the going rate. If the market price is above the average total cost of production, firms will earn short-run economic profits. However, in the long run, new firms will enter the industry to take advantage of these profits, increasing the supply of goods and driving the market price down. This will continue until the price equals the average total cost of production, at which point firms will earn zero economic profit in the long run. Therefore, option B is the best answer.

If the Market Price in a Price-Taking Industry Was Currently