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 we would expect firms to:
A)exit the market in the long run.
B)enter the market in the long run.
C)neither exit nor enter the market in the long run.
D)shut down in the short run.

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 we would expect firms to:
A)exit the market in the long run. 
B)enter the market in the long run. 
C)neither exit nor enter the market in the long run. 
D)shut down in the short run.

Quizplus · Accepted Answer

If the market supply curve is given by S3, then the market price is below the minimum of the average total cost curve, which means that firms are making losses in the short run. Since all firms in the industry have identical cost curves, they will all be making losses. In the long run, some firms will exit the market due to the losses, which will decrease the market supply and increase the market price until it reaches the minimum of the average total cost. At that point, the remaining firms will be making normal profits, and there will be no further incentive for firms to enter or exit the industry. Thus, we would expect firms to exit the market in the long run.

Assume That All Firms in This Industry Have Identical Cost