If there is a decrease in demand for a product in a purely competitive industry, it results in an industry contraction that will end when the product price is
A) greater than its marginal cost.
B) equal to its marginal cost.
C) less than its marginal cost.
D) greater than its average cost.

Question

Quizplus · Accepted Answer

In a purely competitive industry, firms cannot control the price of the product and must accept the market price, which is determined by the intersection of supply and demand. When there is a decrease in demand, the market price will fall below the previous equilibrium price, resulting in a temporary excess supply. This will put pressure on firms to lower their prices to attract customers, which will continue until the price falls to the level of marginal cost. At this price, firms will earn zero economic profit, and no entry or exit will occur. Thus, the industry contraction will end when the product price is equal to its marginal cost.

If There Is a Decrease in Demand for a Product