The figure below depicts the short-run market equilibrium in a perfectly competitive market and the cost curves for a representative firm in that market. Assume that all firms in this market have identical cost curves. Given that the current equilibrium price is $8, what will happen to the number of firms in this market in the long run?
A)The number of firms in the market will not change unless there is a change in either demand or in the cost of production.
B)The number of firms in the market will fall as firms exit the market in response to negative economic profit.
C)It is impossible to determine whether the number of firms in this market will rise or fall.
D)The number of firms in the market will rise as firms enter the market in response to positive economic profit.

Question

The figure below depicts the short-run market equilibrium in a perfectly competitive market and the cost curves for a representative firm in that market. Assume that all firms in this market have identical cost curves.  Given that the current equilibrium price is $8, what will happen to the number of firms in this market in the long run?
A)The number of firms in the market will not change unless there is a change in either demand or in the cost of production. 
B)The number of firms in the market will fall as firms exit the market in response to negative economic profit. 
C)It is impossible to determine whether the number of firms in this market will rise or fall. 
D)The number of firms in the market will rise as firms enter the market in response to positive economic profit.

Quizplus · Accepted Answer

At the short-run equilibrium of $8, each firm in the market earns a positive economic profit, so in the long run new firms will enter the market.

The Figure Below Depicts the Short-Run Market Equilibrium in a Perfectly