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:

Perpetual Inventory System

The inventory system in which each purchase and sale of merchandise is recorded in the inventory account and related subsidiary ledger; therefore, the inventory records are updated continuously.

Conversion Cost

The combined cost of direct labor and manufacturing overheads which are incurred to convert raw materials into finished goods.

Direct Materials

Initial materials specifically allocated for the making of certain goods or provision of services.

Factory Overhead

Indirect manufacturing costs not directly associated with the production of goods, such as depreciation of equipment, maintenance, and utilities.