Assume a perfectly competitive firm is in long-run equilibrium and there is a de

Question

Assume a perfectly competitive firm is in long-run equilibrium and there is a decrease in market demand for the firm's output. Which of the following will occur





a. Existing firms will maintain the original level of output, but they will shift their cost functions down in the short run.



b. Market price will be above its original level.



c. Existing firms will reduce output in the short run.



d. Existing firms will raise price to cover the reduction in quantity demanded and maintain total revenue in the short run.

Explanation / Answer

C is the correct answer. If there is a decrease in demand, existing firms will be forced to reduce output because there will be no one left to buy their surplus goods if they continue to produce at the same rate as when demand was high. Answer A is incorrect for this reason. B is incorrect - if demand decreases, market price will be LOWER than its original level. D is incorrect - if demand goes down, price goes down. Existing firms cannot raise prices because fewer people want to buy their goods at the old price, let alone a new higher price.

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