CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

There are 1,000 identical firms in a purely competitive industry. In the short run, the total revenues of each firm are less than the total costs. What will happen in the long run?
A. Additional firms will enter the market, but the price will remain the same because the existing firms will not allow it to decrease.
B. Firms will exit the market and the product price will rise.
C. Additional firms will enter the market and price will be driven down to where each firm will be making just enough to stay in business (cover its variable costs).
Explanation: In the long run, under economic losses, firms will exit the industry. The contraction in supply caused by this exit will serve to increase the price of the good. Zero economic profits will be restored.

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