In the figure given below MC denotes the marginal cost and AC denotes the average cost of a firm under perfect competition.

-Refer to Figure .What will be the long run effect of the increase in demand (from Q₀ to Q₁) in this market?

Question

In the figure given below MC denotes the marginal cost and AC denotes the average cost of a firm under perfect competition. 
  
-Refer to Figure .What will be the long run effect of the increase in demand (from Q₀ to Q₁) in this market?

Quizplus · Accepted Answer

The increase in demand will shift the equilibrium quantity from Q₀ to Q₁. This will push up the market price from P₀ to P₁. As a result, the firm's revenue will increase, and it will move from making losses to breaking even or making normal profits. In the long run, new firms may enter the market, leading to a shift in the industry supply curve and a lower market price. However, the firm will still break even at the new equilibrium. Therefore, the best choice is B.

In the Figure Given Below MC Denotes the Marginal Cost