perfect competition

[neha 1]

the equilibrium price of water guns in a perfectly competitive market is rs.15.  Each producer has an identical production function where long run AC=MC=20. What will happen to supply and price of water guns in the long run?
a. each firm will continue producing where LRAC=MC no entry and exit occurs.
b. Firms will leave the market, causing a decrease in supply until price equals 20.
c. firms will enter the market until supply increases to fill the extra demand.
d. since equilibrium price is less than min LRAC, the industry will shut down.

[Akshay Jain]

Correct option is b

[ABHI1994]

why not option d?

On 6 May 2015 at 11:09, Akshay Jain [via Discussion forum] <[hidden email]> wrote:

Correct option is b

Akshay Jain
Masters in Economics
Delhi School of Economics
2013-15

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[Kannot]

This would make sense to me in most cases but given that in this case all firms have a horizontal MC curve would this not also mean that the market supply curve is horizontal, therefore being unaffected by the number of firms in the market?

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