Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expect
A)new firms to enter the market.
B)the market price to fall.
C)its profits to fall.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

If a firm operates in the short run at a price above its average total cost of production, it is earning economic profits. This is because its revenue is exceeding its costs, including both variable and fixed costs. However, in the long run, other firms are likely to enter the market in order to take advantage of these profits. This increased supply will cause the market price to fall, making it more difficult for the original firm to earn economic profits. Additionally, the increased competition will likely increase the cost of production for the original firm, further reducing its profits. Therefore, all of the above choices are correct.

Suppose a Firm Operates in the Short Run at a Price