13. In a competitive market that is in long-run equilibrium, a permanent decreas
ID: 1195181 • Letter: 1
Question
13. In a competitive market that is in long-run equilibrium, a permanent decrease in demand A) raises profits in the short run. B) raises the price in the short run. C) leads to new firms entering the market in the long run. D) lowers the price at first but then raises it as firms leave the market 14. In competition, an individual firm A) sets the price and determines the quantity it sells in the marketplace. B) sets the price but does not determine the quantity it sells in the marketplace. C) can not affect its price nor determine the quantity it sells in the marketplace. D) determines the quantity it sells in the marketplace but has no influence over its price.Explanation / Answer
(Q13). If a perfectly competitive market is in long-run equilibrium and permanent decrease in demand occurs then given the supply this decrease in demand will reduce the market price.
As cost structure of each firm differs, this reduction in price will result in economic losses for some firms.
As entry and exit is free in perfectly competitive market, firm incurring economic losses will exit the market.
With some firms exiting the market, total market supply decreases.
This decrease in market supply will raise the market price.
Exit of firms will remain continue until original equilibrium price is attained once again.
However, new equilibrium will have same market price as old equilibrium but with lesser quantity traded and less number of firms as well.
Hence, the correct answer is option (D).
(Q14) Under perfect competition, firm acts as price taker while industry acts as price maker. In other words, industry sets the price of product taking into account market demand and market supply.
Individual firms have to accept that price. However, it can sell as much as it wants at the given price.
So, in a sense, it can determine the quantity it can sell in market place but have no influence over the market price.
Hence, the correct answer is option (D).
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