In Figure 23.3, diagram "a" presents the cost curves that are relevant to a firm's production decision, and diagram "b" shows the market demand and supply curves for the market.Use both diagrams to answer the following question: In Figure 23.3, at a price of p2 in the long run
A) Firms will enter the market.
B) Economic profits equal zero.
C) Firms will exit the market.
D) P = AVC.

Question

In Figure 23.3, diagram "a" presents the cost curves that are relevant to a firm's production decision, and diagram "b" shows the market demand and supply curves for the market.Use both diagrams to answer the following question: In Figure 23.3, at a price of p2 in the long run
A) Firms will enter the market. 
B) Economic profits equal zero. 
C) Firms will exit the market. 
D) P = AVC.

Quizplus · Accepted Answer

At a price of p2 in the long run, economic profits will equal zero as firms will have adjusted their production levels to the market demand and any excess profit will attract new firms to enter the market, increasing competition and lowering prices. This will continue until only normal profits are earned and firms are no longer incentivized to enter or exit the market. Therefore, option B is the correct choice. Option A is incorrect as firms will not enter the market due to the absence of economic profits. Option C is incorrect as firms will not exit the market because they are able to cover their costs. Option D is also incorrect as it refers to the price being equal to the average variable cost, which is not necessarily the case in the long run equilibrium.