If a perfectly competitive firm is operating in long-run equilibrium and market demand suddenly falls, the short-run result will be
A)greater economic profit
B)a normal profit
C)lower average total cost
D)lower average variable cost
E)an economic loss

Question

Quizplus · Accepted Answer

If market demand suddenly falls, the price in the market will also fall. In the short run, the perfectly competitive firm will continue to produce at its profit-maximizing output where marginal cost equals the market price. However, as the price has fallen below the average total cost, the firm will incur losses in the short run. Therefore, the answer is E, an economic loss.

If a Perfectly Competitive Firm Is Operating in Long-Run Equilibrium