Question

Suppose that initially the price is $50 in a perfectly competitive market. Firms are making zero economic profits. Then the market demand shrinks permanently, some firms leave the industry, and the industry returns to a long-run equilibrium. What will be the new equilibrium price, assuming cost conditions in the industry remain constant?
a. $50.
b. $45.
c. Lower than $50 but exact value cannot be known without more information.
d. Larger than $45 but exact value cannot be known without more information.

Answer 1

Answer:

a. $50.

Explanation:

Since the cost conditions remain the same and the market in question is a perfectly competitive one, when the market returns to a long-run equilibrium, the equilibrium price gravitates towards the previous equilibrium price in which economic profit was zero, which is $50, regardless of some firms leaving the industry or not. Note that this behavior is only observed because this is a perfectly competitive market.

Therefore, the answer is alternative a. $50.