Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If the market supply curve is given by S3, then in the long run firms will:
A)exit the market, leading the market supply curve to shift back to S2.
B)exit the market, leading the market supply curve to shift back to S1.
C)enter the market, leading the market supply curve to shift back to S2.
D)neither enter nor exit the market, so the market supply curve will remain at S3.

Question

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive.   If the market supply curve is given by S3, then in the long run firms will:
A)exit the market, leading the market supply curve to shift back to S2. 
B)exit the market, leading the market supply curve to shift back to S1. 
C)enter the market, leading the market supply curve to shift back to S2. 
D)neither enter nor exit the market, so the market supply curve will remain at S3.

Quizplus · Accepted Answer

If the market supply curve is given by S3, then the equilibrium price will be $5. At that price, all firms in the market earn an economic loss, prompting some of them to exit the market in the long run. Exit will continue until all of the remaining firms are earning zero economic profit. As a result, the market supply curve will shift from S3 to S2.

Assume That All Firms in This Industry Have Identical Cost