Suppose That a Competitive Market Is Initially in Long-Run Equilibrium

question 41

Multiple Choice

Suppose that a competitive market is initially in long-run equilibrium. Which of the following are the most likely results of a decrease in market demand?

• A)Some existing firms will produce more while some other firms will exit the market so that the market supply curve will remain the same.
• B)Existing firms will produce less and some firms will exit the market so that the market supply curve will shift to the left.
• C)Existing firms will produce more and new firms will enter the market so that the market supply curve will shift to the right.
• D)Existing firms will produce less while new firms will enter the market so that the effect on the market supply curve is uncertain.
• E)Nothing will change in the market.

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Definitions:

Operating Leverage

Operating leverage refers to the degree to which a company can increase operating income by increasing sales, highlighting the impact of fixed versus variable costs.

Operating Income

The profit realized from a business's operational activities, calculated before interest and taxes.

Operating Leverage

A measure of how revenue growth translates into growth in operating income, indicating the degree to which a company can increase profit by increasing sales.

Variable Costs

Charges that shift in alignment with the volume of production or service tasks.