The following figure shows the marginal cost curve and the average total cost curve of a firm operating in a perfectly competitive market. All of the other firms in this market have a cost structure similar to this firm's.

-Refer to the figure above.Suppose the price in this market is $5.We expect ________.
A) the firms to start exiting this market
B) the firms to start entering this market
C) no entry or exit in this market
D) exit from this market, followed by entry of firms into this market

Question

The following figure shows the marginal cost curve and the average total cost curve of a firm operating in a perfectly competitive market. All of the other firms in this market have a cost structure similar to this firm's.
 
-Refer to the figure above.Suppose the price in this market is $5.We expect ________.
A) the firms to start exiting this market 
B) the firms to start entering this market 
C) no entry or exit in this market 
D) exit from this market, followed by entry of firms into this market

Quizplus · Accepted Answer

At a price of $5, firms are making a profit (P > ATC). This will attract new firms to enter the market, increasing the supply and driving the price down.

The Following Figure Shows the Marginal Cost Curve and the Average