Suppose a competitive market has a horizontal long-run supply curve and is in long-run equilibrium. If demand decreases, we can be certain that in the short-run,
A)at least some firms will shut down.
B)price will fall below marginal cost for some firms.
C)price will fall below average total cost for some firms.
D)at least some firms will enter the industry.

Question

Quizplus · Accepted Answer

Since the market has a horizontal long-run supply curve, firms are operating at their minimum efficient scale and are earning zero economic profits in the long-run equilibrium. A decrease in demand will cause a shift in the demand curve, leading to a temporary excess supply in the market. As a result, firms will reduce their output levels, causing their average total cost to increase due to diseconomies of scale. If the price falls below their average total cost, they will incur losses in the short-run and some firms may choose to shut down. Therefore, we can be certain that price will fall below average total cost for some firms in the short-run.

Suppose a Competitive Market Has a Horizontal Long-Run Supply Curve