Chapter 11R, Problem 13MCQ

To determine

The correct option for given situation where the effect on existing firm due to entry of new firm in perfectly competitive cost constant industry takes place.

Answer to Problem 13MCQ

Option b is correct answer.

Explanation of Solution

Explanation for correct option:

b.

If the firm is entering the perfectly competitive industry which is cost constant then each firm entering the industry will affect the level of production of existing firm and the price of the product. In given case, prices will fall and production of existing firm will decrease. Therefore, option b is correct.

Explanation for incorrect options:

a.

If production is increased then supply will be increased due to which existing firm will incur losses in long-run. Therefore, option a is incorrect.

c.

The prices will not rise as the new firm will offer similar products in the existing market which will try to promote its sales by using various marketing techniques. Therefore, option c is incorrect.

d.

Prices will reduce as the new firm is entering the cost constant industry. This will force other firms to reduce the production so that supply-demand can be balanced. Therefore, option d is incorrect.

e.

The prices of the products will be decreased if new firm is entered in the perfectly competitive cost constant industry. Also, the existing firms are required to reduce their level of output as new firm will also deliver some output to meet consumer demands. The products sold in such industry are same which will increase the competition level in the market. Therefore, option e is incorrect.

Economics Concept Introduction

Average total cost: Average total cost of production per unit is comprised of two cost components that is average fixed cost and average variable cost. In short-run, fixed cost of the production remains similar.