Assume that a perfectly competitive market is in long-run equilibrium.Suppose as a result of a health hazard associated with the industry's product, demand decreases drastically.What is the immediate result of this event?
A)The market price falls and the typical firm suffers an economic loss.
B)The market supply increases to offset the fall in demand.
C)The typical firm's average total cost curve shifts downward.
D)The typical firm's marginal cost curve shifts to the left.

Question

Quizplus · Accepted Answer

A decrease in demand will lead to a decrease in the equilibrium price in a perfectly competitive market. As a result, the typical firm will suffer an economic loss since the market price will now be below the average total cost. The market supply will not increase to offset the fall in demand since the industry is already in long-run equilibrium, which means that all firms are already producing at their optimal level. The typical firm's average total cost curve and marginal cost curve will also not be affected by the decrease in demand.

Assume That a Perfectly Competitive Market Is in Long-Run Equilibrium