Multiple Choice
Suppose the cost curves apply to all firms in the industry. If the initial price is P1, in the long run, the market
11. Perfect Competition
Long Run Equilibrium
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A new study shows that eating raw garlic keeps vampires away (vampires have become a huge problem). This news shifts the demand curve for raw garlic to the right. In response, new firms enter the garlic market. While firms are entering the market, the price of raw garlic ____________ and the profit of each existing firm _____________.
A
Falls; rises
B
Rises; falls
C
Rises; rises
D
Falls; falls
Verified step by step guidance1
Understand the initial impact: The news that eating raw garlic keeps vampires away increases the demand for raw garlic, shifting the demand curve to the right.
Analyze the immediate effect on price: With an increase in demand and the supply initially unchanged, the price of raw garlic will rise.
Consider the market entry: The higher price attracts new firms to enter the market, increasing the supply of raw garlic over time.
Evaluate the long-term effect on price: As new firms enter and supply increases, the price of raw garlic will eventually fall back towards the original equilibrium or even lower.
Assess the impact on profits: With increased competition and falling prices, the profit of each existing firm will decrease as the market reaches a new equilibrium.
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