Suppose that initially the price is $20 in a perfectly competitive market. Firms

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?

A. $20

B. $16

C. Lower than $20 but exact value cannot be known without more information.

D. Larger than $20 but exact value cannot be known without more information.

Explanation / Answer

The correct answer is A. $20

In Perfect Competition, in long run firms earn zero economic profit so price would be exactly what they were before.

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