Question

In pure competition, if the market price of the product is higher than the minimum average total cost of the firms, then. Multiple Choice

a)some firms will exit the industry and the industry supply will decrease.
b)other firms will enter the industry and the industry supply will increase.
c)some firms will exit the industry and the industry supply will increase.
d)other firms will enter the industry and the industry supply will decrease.

Answer 1

In pure competition, if the market price of the product is higher than the minimum average total cost of the firms, other firms will enter the industry and the industry supply will increase.

Step-by-step explanation:

This will temporarily make the market price rise above the minimum point on the average cost curve, and therefore, the existing firms in the market will now be earning economic profits. However, these economic profits attract other firms to enter the market. Entry of many new firms causes the market supply curve to shift to the right. As the supply curve shifts to the right, the market price starts decreasing, and with that, economic profits fall for new and existing firms. As long as there are still profits in the market, entry will continue to shift supply to the right. This will stop whenever the market price is driven down to the zero-profit level, where no firm is earning economic profits.