The figure below shows the supply and the demand for a good (left) and the cost curves of an individual firm in this market (right). Assume that all firms in this market, including the potential entrants, have identical cost curves. Initially, the market is in equilibrium at point A.

-Refer to the figure above.Suppose that the market has reached the long-run equilibrium.Then,due to news of the product's defects and recall,the demand falls by 4 units at each price.At the new equilibrium,each firm in the market earns ________ and there will be ________.

Question

The figure below shows the supply and the demand for a good (left) and the cost curves of an individual firm in this market (right). Assume that all firms in this market, including the potential entrants, have identical cost curves. Initially, the market is in equilibrium at point A.
 
-Refer to the figure above.Suppose that the market has reached the long-run equilibrium.Then,due to news of the product's defects and recall,the demand falls by 4 units at each price.At the new equilibrium,each firm in the market earns ________ and there will be ________.

Quizplus · Accepted Answer

The decrease in demand leads to a leftward shift of the demand curve, causing a new equilibrium at a lower price and quantity. The new equilibrium price intersects with the average total cost curve (ATC) of each firm at a quantity lower than the previous equilibrium. This means that each firm is now earning negative economic profit. As a result, some firms will exit the market in the long-run, leading to a decrease in the number of firms and a decrease in supply until the remaining firms earn zero economic profit.

The Figure Below Shows the Supply and the Demand for a Good