If in a perfectly competitive market, firms are facing a price below their average total cost but above average variable cost at the profit-maximizing output, then
A)the industry supply will not change.
B)new firms are attracted to the industry.
C)some existing firms will exit the industry.
D)firms are breaking even.

Question

Quizplus · Accepted Answer

If firms are facing a price below their average total cost, they are making economic losses in the short run. However, if the price is above the average variable cost, firms are covering their variable costs and can continue producing in the short run. Nevertheless, if firms are making losses in the long run, some of them will exit the industry, leading to a decrease in supply and a potential increase in price. Therefore, answer C is correct as some existing firms will exit the industry. Answer A is incorrect because if the firms are making losses, some of them will exit the industry, leading to a decrease in supply. Answer B is incorrect because if new firms enter the industry, it will increase the supply, leading to a further decrease in price. Answer D is incorrect because if firms are making economic losses, they are not breaking even.

If in a Perfectly Competitive Market, Firms Are Facing a Price