Map on pling In a perfectly (or purely) competitive industry, all firms have the

Question

Map on pling In a perfectly (or purely) competitive industry, all firms have the same costs. All firms have a minimum average total cost of $100 at a quantity of 260 and a minimum average variable cost of $46 at a quantity of 100. Initially, the industry is in long run equilibrium At the long run equilibrium, the price is : Suppose that the demand for the product decreases. Rank the events below in the order that each occurs after demand decreases until price returns to long run equilibrium. Note, not all of the events need be placed . Demand Decreases Number $0 ... until the market reaches the long run equilibrium price. Price Decreases Price Increases Supply Increases Supply Decreases Firms Enter Firms Exit

Explanation / Answer

If demand falls with same level of supply then :

1) Price decreases

2) Firms exit

3) Supply decreases

4) Price increases

5) Firms enter

As price falls due to fall in demand(leftward shift of demand curve) , firms exit the market since due to lower profit level. Fall in supply means the supply curve shifts to the left. Now the new price level is at higher level due to fall in supply. Seeing the higher price level in the market, firms again enter the market in search of higher profits.

This process continues till long run equilibrium price(min. ATC) , $100, is achieved.

4)

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