$13 $11 $9 $7 S5 $37 4 21. efer to Table 16-7. If the firm has a constant margin
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$13 $11 $9 $7 S5 $37 4 21. efer to Table 16-7. If the firm has a constant marginal cost of $5 per unit, which of the following would 21. Refer to Table 16-7. ou expect to occur in the long run in this market? a. New firms will enter the market and profits for firms in the market will fall. b. New firms will enter the market and profits for firms in the market will rise. c. Firms will leave the market and profits for firms that remain in the market will rise. d. Firms will leave the market and profits for firms that remain in the market will fal. If the firm hExplanation / Answer
This is a perfectly competitive market where there are lots of firms. Equilibrium in this market is (P = MC); Price = P, and Marginal cost = MC.
Given MC = $5
Therefore, the equilibrium price, P = MC = $5
The equilibrium quantity (Q) at the equilibrium price is 6 units (from the table).
Firms will enter the market if there is additional profit; firms will leave the market if there is additional loss.
Profit / (Loss) = Total revenue – Total cost
= (Equilibrium price × Equilibrium quantity) – (Fixed cost + Variable cost)
= ($5 × 6) – ($10 + ($5 × 6))
= $30 - $40
= ($10)
Since there is a loss, few firms will leave the market. In that case, all the remaining firms can’t meet the whole market demand; supply reduces in the market; which makes the price up, and profit up.
Answer: c
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