- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 1. The Firm and Market Structures
- Subject 6. Perfect Competition
CFA Practice Question
Suppose that in the pizza delivery market, as the number of stores increases, prices and average costs change in the following manner: 1 store; price=$12, average cost=$6, 2 stores; price=$10, average cost=$7, 3 stores; price=$8, average cost=$8, 4 stores; price=$6, average cost=$9. How many pizza delivery firms will enter this market in the long run?
A. 1
B. 2
C. 3
Explanation: In a competitive market, firms will continue to enter until the price equals the average cost.
User Contributed Comments 5
| User | Comment |
|---|---|
| soarer1 | can someone pls explain? |
| umair | soarer1---Firms will continue to enter until there is no longer a profit |
| Candy220 | At the point where P = MC, you're earning 0 economic profit. 3 stores fit that scenario |
| jpducros | 3 stores lead to no accounting profit. I doubt in the long run this situation is sustainable. We should naturally go back to 2 stores and I store would exit. |
| cebus | So shouldn't it be 2 stores in long run since one will exit? |