Question

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.

Answer 1

Answer:

The correct answer is option b.  

Explanation:

The marginal cost is equal to the price or marginal revenue. The average variable cost is lower than the price level. This shows that the firm will be earning profits in the short run.  

This will attract new firms to enter the market. As new firms can enter in the short run, the existing firms will continue producing enjoy profits. In the long run, though, the new firms will enter this will lead to an increase in supply. Consequently, the price will fall. This will continue until all firms reach break even.