Multiple Choice
Which of the following is an example of a long-run adjustment in a firm's production process?
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11. Perfect Competition
Long Run Equilibrium
Multiple Choice
How does a technological improvement affect competitive firms?
A
It raises firms' marginal and average costs, decreasing supply and increasing the equilibrium price.
B
It permanently increases firms' economic profits without affecting market price or inducing entry.
C
It reduces firms' costs, shifts market supply right, causes a lower equilibrium price and short-run profits that are competed away in the long run.
D
It shifts the market demand curve right, increasing both the equilibrium price and industry output.
Verified step by step guidance1
Understand that a technological improvement typically makes production more efficient, which means firms can produce the same output at a lower cost.
Recognize that this reduction in costs lowers both the marginal cost (MC) and average cost (AC) curves for each firm.
Since firms face lower costs, the market supply curve shifts to the right, indicating an increase in total quantity supplied at every price level.
With supply increasing and demand remaining constant, the new equilibrium will have a lower price and higher quantity traded in the market.
In the short run, firms may earn economic profits due to lower costs and higher output, but in the long run, these profits attract new firms, increasing supply further and driving profits back to zero.
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