The following figure represents the cost curves and the market price for a perfectly competitive firm. Which of the following statements is true about the long run equilibrium in this market?

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BlackTom AI · Accepted Answer

The question asks about long-run equilibrium in a perfectly competitive market, given the cost curves and market price in the figure.
Option A: More firms enter, price falls, and each firm produces less quantity. In the long run, if firms earn profits, new firms enter, which increases industry supply and pushes the market price downward. As price falls, each firm faces a lower MR equal to the price, so the profit-maximizing output per firm declines (since MC rises with quantity and MR/price is lower). At the same time, the entry continues until price equals minimum average total cost, so each firm operates at the efficient scale. This scenario is consistent with the standard long-run adjustment process toward zero economic profit and larger industry size with lower average cost per firm. 
Option B: More firms enter, price falls, and each firm produces more quantity. While entry reduces price, the firm’s profit-maximizing quantity is determined where MC = MR, and with a lower price the quantity where MC equals MR typically decreases, not increases. Thus this option conflicts with the typical response of output per firm when price falls in a competitive long-run setting. 
Option C: Some firms exit, price increases, and each firm produces more quantity. Exit reduces industry supply, which tends to raise price. However, in a long-run adjustment to zero profit, price should move toward the minimum average cost, not stay above it due to ongoing exits. Additionally, an increase in price would, given the lower price in the short-run, typically reduce, not increase, the output per firm if MC is upward-sloping. This combination is inconsistent with the standard long-run equilibrium process where exit leads to a new lower quantity per firm at the remaining scale, and price converges to the minimum AC. 
Option D: Some firms exit, price increases, and each firm produces less quantity. Exit would raise price, but the effect on quantity per firm is ambiguous here; with higher price, each firm would adjust output where MC = MR, which could be a different level, often not simply “less” across all firms. The claim that output per firm necessarily falls in this scenario does not capture the typical long-run adjustment toward zero profits and the efficient scale under competition. 
In summary, the long-run adjustment in perfect competition involves entry when profits exist, driving price down toward the minimum AC and expanding the number of firms, with each firm operating at the efficient scale, which implies a lower quantity per firm when price falls. The options describing entry, falling price, and reduced per-firm output align with this logic, whereas the options focusing on exit with rising price and increased per-firm output fail to reflect the standard long-run equilibration dynamics.

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The following figure represents the cost curves and the market price for a perfectly competitive firm. Which of the following statements is true about the long run equilibrium in this market?

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