# Suppose that the pen-making industry is perfectly competitive. Also suppose that all current f

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Suppose that the pen-making industry is perfectly competitive. Also suppose that all current firms and any potential firms that might enter the industry 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 the equilibrium price to be in the long run? LO11.2 a. $0.25. b. $1.00. c. $1.25. d. $1.50. |

Here is the full solution including the answer and explanation.

Explanation

c is correct

In the short run, the selling price of Product P is $1.50 and the minimum average total cost is $1.25. The firm earns a supernormal profit, as the selling price is greater than the average minimum total cost. New firms will enter the market attracted by the profit. The supply of Product P will increase and the price will decrease upto the minimum average total cost. Consequently, in long run, the firm will sell the product at $1.25.

a is incorrect

A perfectly competitive firm produces Product P. The minimum average total cost is $1.25. The selling price of the product is $1.50. If the firm will sell the product at $0.25, then it will not cover the minimum cost. The firm will lose and shut down.

b is incorrect

If the selling price of Product P is $1.00, then in the long run, the firm cannot cover up the minimum cost of $1.25, and the firm will lose.

d is incorrect

The firm earns a supernormal profit, as the selling price is greater than the minimum cost. New firms will enter the industry and increase the supply of the product. This will decrease the price up to the minimum average total cost. Consequently, the long run selling price of the product is $1.25.

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