Question

Suppose, at a given point in time, Lynn's Licorice Loft sells licorice in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production Lynn's average total cost of producing licorice is $1.10, her average variable cost is $1.00, and her marginal cost is $2.10. Over time, the number of licorice sellers in the market will_______, everything else held constant.

Answer 1

Over time, the number of licorice sellers in the market will decrease everything else held constant. As more licorice sellers enter the market, the market price for licorice will decrease.

When the price of licorice decreases, firms will reduce their production level in order to generate higher profits. This decrease in production level will lead to a decrease in the number of licorice sellers in the market. As the number of licorice sellers decreases, the market price of licorice will increase, leading to an increase in the number of licorice sellers in the market. This process will continue until the market reaches an equilibrium point where the number of licorice sellers remains constant.

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