Suppose in a perfectly (or purely) competitive industry, all firms have a minimum average total cost (ATC) of $100 at aquantity of 200 and a minimum average variable cost (AVC) of $46 at a quantity of 100. Initially, the industry is inlong-run equilibrium.What is the long-run equilibrium price?long-run equilibrium price = $100Suppose that the demand for the product decreases. Arrange the events in the order in which they occur after demanddecreases until price returns to long-run equilibrium. Note that not all of the events need to be placed. After demand decreasesprice increasessupply increasesprice decreasesfirms exitsupply decreasesfirms enterUntil the market returns to long-run equilibrium priceAnswer Bank

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Asked Dec 13, 2019
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Suppose in a perfectly (or purely) competitive industry, all firms have a minimum average total cost (ATC) of $100 at a
quantity of 200 and a minimum average variable cost (AVC) of $46 at a quantity of 100. Initially, the industry is in
long-run equilibrium.
What is the long-run equilibrium price?
long-run equilibrium price = $
100
Suppose that the demand for the product decreases. Arrange the events in the order in which they occur after demand
decreases until price returns to long-run equilibrium. Note that not all of the events need to be placed.
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Suppose in a perfectly (or purely) competitive industry, all firms have a minimum average total cost (ATC) of $100 at a quantity of 200 and a minimum average variable cost (AVC) of $46 at a quantity of 100. Initially, the industry is in long-run equilibrium. What is the long-run equilibrium price? long-run equilibrium price = $ 100 Suppose that the demand for the product decreases. Arrange the events in the order in which they occur after demand decreases until price returns to long-run equilibrium. Note that not all of the events need to be placed.

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After demand decreases
price increases
supply increases
price decreases
firms exit
supply decreases
firms enter
Until the market returns to long-run equilibrium price
Answer Bank
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After demand decreases price increases supply increases price decreases firms exit supply decreases firms enter Until the market returns to long-run equilibrium price Answer Bank

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Expert Answer

Step 1

The perfect competition, in the long-term earns zero economic profit. Thus, in the long run, firms produce the level of output at which the average total cost is minimum.

Step 2

Hence, the long-run equilibrium price is equal to the minimum average cost at quantity of 200. The long run equilibrium price is equal to $100. This is shown in the figure below. At point A, the average total cost curve is at its minimum point.

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Long Run Equilibrium under Perfect Competition мC ATC -P=AR=MR s100 200 Output Revenue/Cost

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Step 3

When the demand for a product decreases, its price falls due to leftward shift in the demand curve. The price falls so much that the firms are unable to cover their minimum average cost. As a result, many firms exit the industry. Due to fall in the numb...

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