CFA Practice Question
All firms in a competitive industry have identical cost and production schedules.
1 | 53 | 60 | 60
2 | 32 | 113 | 56.5
3 | 26 | 145 | 48.33
4 | 21 | 171 | 42.75
5 | 19 | 192 | 38.4
6 | 20 | 211 | 35.17
7 | 27 | 231 | 33
8 | 30 | 258 | 32.25
9 | 32 | 288 | 32
10 | 40 | 320 | 32
11 | 50 | 360 | 32.73
12 | 65 | 410 | 34.17
Quantity | Marg Cost | Total Cost | Avg Cost
1 | 53 | 60 | 60
2 | 32 | 113 | 56.5
3 | 26 | 145 | 48.33
4 | 21 | 171 | 42.75
5 | 19 | 192 | 38.4
6 | 20 | 211 | 35.17
7 | 27 | 231 | 33
8 | 30 | 258 | 32.25
9 | 32 | 288 | 32
10 | 40 | 320 | 32
11 | 50 | 360 | 32.73
12 | 65 | 410 | 34.17
Suppose the market was initially in competitive equilibrium. Then, due to a fall in demand, the price in the market for one unit falls $30 (market not in competitive equilibrium). In the long run:
A. Some firms will exit the industry and price will rise.
B. Whether the number of firms in the industry increase or decrease depends upon whether marginal cost is greater than total cost.
C. The number of firms in the industry will remain unchanged and price will rise.
Explanation: In the long run (as all long run costs are variable) some firms will exit the market. This will reduce supply and push up price to the point where economic profits for firms are zero (and thus removing the incentive for the remaining firms to exit the industry).
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