Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase in demand that results in positive profits for the firms. Which of the following events are then most likely to occur? (i)
New firms will enter the market.
(ii)
In the short run, price will rise; in the long run, price will rise further.
(iii)
In the long run, all firms will be producing at their efficient scale.
A)(i) and (ii) only
B)(i) and (iii) only
C)(ii) and (iii) only
D)(i), (ii) and (iii)

Question

Quizplus · Accepted Answer

If firms are experiencing positive profits, new firms will be attracted to the market, leading to an increase in supply and a decrease in price in the long run (not a rise in price, as stated in option (ii)). As more firms enter the market, they will continue to produce at their efficient scale in the long run, leading to all firms producing at their efficient scale. So, option (i) and (iii) are likely events to occur, while (ii) is incorrect. Therefore, the best choice is B.

Suppose a Competitive Market Is Comprised of Firms That Face