A Competitive Market Is in Long-Run Equilibrium

question 3

Multiple Choice

A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will

• A)fall in the short run.All firms will shut down, and some of them will exit the industry.Price will then rise to reach the new long-run equilibrium.
• B)fall in the short run.No firms will shut down, but some of them will exit the industry.Price will then rise to reach the new long-run equilibrium.
• C)fall in the short run.All, some, or no firms will shut down, and some of them will exit the industry.Price will then rise to reach the new long-run equilibrium.
• D)not fall in the short run because firms will exit to maintain the price.

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Definitions:

Zero Coupon

A type of bond that does not pay periodic interest payments but instead is sold at a deep discount from its face value and pays its full face value at maturity.

Imputed Interest

The assumed interest rate used by the IRS for tax purposes on loans with little or no interest, to ensure that tax is collected on essentially interest-free loans.

Call Provision

A clause in a bond's contract that allows the issuer to redeem the bond before its maturity date under specific conditions.

Retire Bonds

The process of paying off or redeeming bonds before or at maturity to eliminate debt obligations.