In a competitive market the current price is $5. The typical firm in the market has ATC = $5.50 and AVC = $4.50.
A)In the short run firms will shut down, and in the long run firms will leave the market.
B)In the short run firms will continue to operate, but in the long run firms will leave the market.
C)New firms will likely enter this market to capture any remaining economic profits.
D)The firm will earn zero profits in both the short run and long run.

Question

Quizplus · Accepted Answer

The firm's price is lower than the ATC so it is experiencing losses in the short run. However, since the price is equal to the minimum AVC, the firm will continue to operate in the short run, albeit at a loss. In the long run, firms will exit the market since they cannot cover their fixed costs. This will cause the market supply to decrease, and eventually, the market price to rise to the equilibrium level where firms earn zero economic profit. Therefore, in the long run, only the most efficient firms will remain in the market.

In a Competitive Market the Current Price Is $5