-Refer to Figure 7-11.Suppose the prevailing price is P₁ and the firm is currently producing its loss-minimising quantity.If the firm represented in the diagram continues to stay in business,in the long-run equilibrium A) it will reduce its output to Q₀ and face a price of P₀. B) it will continue to produce Q₁ but faces the higher price of P₂. C) it will expand its output to Q₂ and face a price of P₂. D) it will expand its output to Q₃ and face a price of P₁.

Question

Quizplus · Accepted Answer

In the long-run equilibrium, firms will adjust their output to where marginal cost equals marginal revenue at the new equilibrium price, which is typically higher than the initial loss-minimizing price. Thus, the firm will expand output to Q2 and face a price of P2.