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:

Operating Leverage

The degree to which a firm can use fixed operating costs to magnify the effects of changes in revenue on its operating income.

Salesvolume

Refers to the total number of units sold within a specific period.

Net Operating Income

The profit generated from a business's operations after subtracting operating expenses, but before interest and taxes.

Degree Of Operating Leverage

A financial ratio that measures the sensitivity of a company's operating income to a change in its sales volume.