Suppose a competitive market is comprised of firms that face identical cost curves.The firms experience an increase in demand that results in positive profits for the firms.Which of the following events are then most likely to occur?

Question

Quizplus · Accepted Answer

(i) New firms enter the market.
This is less likely to occur as the market is already comprised of identical cost curves and the existing firms are making positive profits. There is no reason for new firms to enter the market and compete for the same profits.

(ii) Existing firms exit the market.
This is not likely to occur as the firms are making positive profits. There is no reason for firms to exit the market if they are making profits.

(iii) Existing firms increase output.
This is the most likely event to occur as the firms are experiencing positive profits and there is an increase in demand. They would want to increase their output to meet the increased demand and capitalize on the profits.

Therefore, the answer is B) (i) and (iii)only.

Suppose a Competitive Market Is Comprised of Firms That Face