Question

In a perfectly competitive industry, the current short-run equilibrium has P>ATC. In the long run equilibrium, there will be:

1. More firms in the market
2. Less firms in the market
3. The number of firms would not change
4. Any of above
5. None of above

Answer 1

Option D

In a long-run equilibrium of a competitive market with identical firms, the relationship between price P, marginal cost MC, and average total cost ATC is
Price is equal to marginal cost and is equal to average total cost.
P = MC and P = ATC.

In the long-run, economic profit cannot be sustained. The arrival of new firms in the market causes the demand curve of each individual firm to shift downward, bringing down the price, the average revenue and marginal revenue curve. In the long-run, the firm will make zero economic profit. Its horizontal demand curve will touch its average total cost curve at its lowest point. I Inthe long run, a firm is free to adjust all of its inputs. New firms can enter any market; existing firms can leave their markets