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 2 units at each price.The market will tend toward the new long run equilibrium where ________.

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 2 units at each price.The market will tend toward the new long run equilibrium where ________.

Quizplus · Accepted Answer

When the demand falls by 2 units at each price, the demand curve shifts to the left, hitting the original supply curve at point B. This reduces the equilibrium quantity to 4 units and increases the equilibrium price to $2.00. At this new equilibrium, the industry will make zero economic profit, which means that the firms earn normal profits and have no incentive to enter or exit the market. In the long-run, the market competitive forces will drive out inefficient firms and keep the efficient ones in the industry, leading to a lower price and a higher quantity supplied than the initial equilibrium. Therefore, choice C is the correct answer.

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