- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 1. The Firm and Market Structures
- Subject 6. Perfect Competition
CFA Practice Question
If the retailing industry is perfectly competitive and Wal-Mart opens five new stores, output must be such that ______
A. price equals marginal cost.
B. marginal cost equals average total cost.
C. price exceeds average total cost.
Explanation: If price exceeds average total cost, then economic profits exist and new firms or stores will be opened.
User Contributed Comments 8
| User | Comment |
|---|---|
| danlan | By opening new stores, fixed cost increases also, it's why it is needed that the price exceeds ATC. |
| eddeb | To open new stores, there must be economic profit opportunity, such that Price exceeds ATC |
| bobert | If you open new stores, is that not a LR operation? Therefore, there are no fixed costs to worry about. I intially picked A, but C makes more sense looking at it because again, in the long run, the plant can be changed to reduce costs, and price must be greater than ATC. To further explain, in the SR, a firm cannot change fixed costs which is the reasoning why if your profit is greater than AVC you should remain in business. It is the LR where the firm adjusts fixed costs, and if you cannot keep profit above ATC, a firm should leave the market. |
| bobert | Also, from the LOS, if Walmart was even able to open 5 new stores, this infers that there is economic profit, and in the LR there is no economic profit. If it exists, firms will enter to take advantage of it, and bring the LR to equilibrium. If price = MC, there is no economic profit to be had because this is where profit is maximized. To go full circle with my explanation, when there is economic loss, firms will exit, and thus price will rise back to equilibrium, eliminating economic loss. Hope this all helped out a bit. |
| CoffeeGirl | the Q is "what will make Wal mart to open additional 5 new store?" Only when there is economic profit, which mean price > ATC |
| rrichmondo | Good question - tricky but makes sense! |
| boddunah | very nice question . |
| hoyleng | thanks coffeegirl |