A perfectly competitive firm in a constant-cost industry produces 3,000 units of a good at a total cost of $36,000.The prevailing market price is $15.What will happen to the number of firms in the industry and to the industry's output in the long run?
A)The number of firms and the industry's output increase.
B)The number of firms and the industry's output decrease.
C)The number of firms remains constant and the industry's output increases.
D)The number of firms remains constant and the industry's output decreases.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms will enter the industry if there are economic profits to be made and exit the industry if there are economic losses. Since the cost of producing each unit for a perfectly competitive firm remains constant, the firm's marginal cost is equal to its average total cost. In this case, the firm's average total cost is $12 per unit ($36,000/3,000 = $12). Since the market price is $15 per unit, this means the firm is earning a profit of $3 per unit ($15 - $12 = $3). As a result, new firms will enter the industry, increasing the industry's total output. This process will continue until the price is driven down to where firms are earning zero economic profits (i.e., the price equals the minimum average total cost). At this point, no more firms will enter or exit the industry, and the industry will be in long-run equilibrium. Therefore, the number of firms and the industry's output will increase in the long run.

A Perfectly Competitive Firm in a Constant-Cost Industry Produces 3,000