Question

What will likely happen to firms in this industry in the long run? What will be the long-run price of output sold in this market in the long run? Explain how you know what will happen to prices and firms in the long run. 2 2 9 . 8 MC ATC AVC 23 MR 0 14 17 19 Quantity (units)

Answer 1

In this industry, in the short run the firms are making loss. In the above figure, the per unit loss is $7(i.e., 23 - 16). So, in the long run, some firms will exit the industry. When some firms exit the industry, aggregate supply will decrease. The price will increase in the long run. The firms are continue to exit and the price will continue to increase until all the firms normal profit.