Figure 12-17

The graphs in Figure 12-17 represent the perfectly competitive market demand and supply curves for the apple industry and demand and cost curves for a typical firm in the industry.
-Refer to Figure 12-17.Which of the following statements is true?
A)The current market price is $3 but the firm will be able to increase the price in the future.
B)The current market price is $3 but the price will fall in the long run as a result of a decrease in demand.
C)The current market price is $3 but the price will fall in the long run as new firms enter the market.
D)The current market price is $3 but the price will increase in the future as the market demand increases.

Question

Figure 12-17
  
The graphs in Figure 12-17 represent the perfectly competitive market demand and supply curves for the apple industry and demand and cost curves for a typical firm in the industry.
-Refer to Figure 12-17.Which of the following statements is true?
A)The current market price is $3 but the firm will be able to increase the price in the future. 
B)The current market price is $3 but the price will fall in the long run as a result of a decrease in demand. 
C)The current market price is $3 but the price will fall in the long run as new firms enter the market. 
D)The current market price is $3 but the price will increase in the future as the market demand increases.

Quizplus · Accepted Answer

The intersection of the market demand and supply curves determines the current market price of $3. The firm's cost curve intersects with the marginal revenue curve at a quantity of 20 and a price of $3. At this price, the firm is earning zero economic profit, which indicates that there is no incentive for new firms to enter the market. However, if the market price were to increase, new firms may enter, driving the price down in the long run. Therefore, option C is the best answer.

Figure 12-17 The Graphs in Figure 12-17 Represent the Perfectly Competitive Market