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. The long-run market equilibrium quantity in this industry is:
A)300.
B)500.
C)700.
D)more than 700.

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.  The long-run market equilibrium quantity in this industry is:
A)300. 
B)500. 
C)700. 
D)more than 700.

Quizplus · Accepted Answer

In the short run, the market is in equilibrium at a price of $36 and quantity of 500 units. At this price, the firm is making a positive economic profit as its average total cost is $30. In the long run, this profit will attract new firms to enter the market, shifting the supply curve to the right, and causing the price to decrease. This process will continue until the price is equal to the minimum average total cost of the firms, which is $25 in this case. At this price, the quantity demanded is 500, which is the long-run equilibrium quantity. Therefore, the answer is B.

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