If in a perfectly competitive industry, the market price facing a firm is below its average total cost but above average variable cost at the output where marginal cost equals marginal revenue
A)the industry supply will not change.
B)new firms are attracted to the industry.
C)some existing firms will exit the industry.
D)firms are breaking even.

Question

Quizplus · Accepted Answer

Since the market price is below the average total cost, the firms are incurring losses. However, since the market price is above the average variable cost, the firms are covering their variable costs and can continue to produce in the short run. At the output where marginal cost equals marginal revenue, the firms are producing at the most efficient level, but are still making losses. Some existing firms will find it difficult to continue operating at a loss, and will exit the industry. This will decrease the supply in the industry, and eventually increase the market price. As a result, the remaining firms may eventually break even or make profits. New firms will not be attracted to the industry because the market price is below the average total cost, and they would also incur losses.

If in a Perfectly Competitive Industry, the Market Price Facing