Question

Suppose that initially the price is $20 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

Answer 1

$20

Step-by-step explanation:

A perfect competition is characterised by many buyers and sellers of homogeneous goods and services. Market prices are set by the forces of demand and supply. There are no barriers to entry or exit of firms into the industry.

In the long run, firms earn zero economic profit. If in the short run firms are earning economic profit, in the long run firms would enter into the industry. This would drive economic profit to zero.

Also, if in the short run, firms are earning economic loss, in the long run, firms would exit the industry until economic profit falls to zero.

demand falls and so does supply. therefore price would remain unchanged in the long run equilibrium.