Question

Suppose that the pen-making industry is perfectly competitive. Also suppose that each current firm and any potential firms that might enter the industry all have identical cost curves, with minimum ATC = $1.25 per pen. If the market equilibrium price of pens is currently $1.50, what would you expect it to be in the long run?
(A) $0.25
(B) $1.00
(C) $1.25
(D) $1.50

Answer 1

Answer:

C

Explanation:

The perfect competitive market theory states that in the long run the marginal income is equal to the marginal cost. This happens because there are not barriers to entry and all firms face the same costs. If one or more firms are having benefits, which means that the price is higher than the marginal cost, then other firms will enter to the market and prices will drop. The marginal cost is the additional cost of producing an extra unit of output, in this case the problem is giving us this information by providing the ATC (additional total cost). Then, in the long run the equilibrium price will be equal to $1.25.