Asked by Kenrick Mendez on Jun 19, 2024
Verified
Suppose that the market for haircuts in a community is perfectly competitive and that the market is initially in long-run equilibrium.Subsequently,an increase in population increases the demand for haircuts.In the short run,the typical firm is likely to:
A) earn an economic profit.
B) incur an economic loss.
C) have no change in its economic profit.
D) have neither an economic profit nor an economic loss.
Economic Profit
Economic profit is the surplus obtained after subtracting both the explicit and implicit costs from total revenues, emphasizing the opportunity costs of resources used.
Economic Loss
A decrease in monetary value, wealth, or resources, especially as a result of business activities or market factors.
- Explain how fluctuations in market demand influence both the price and production levels of a perfectly competitive industry over short and long-term periods.
Verified Answer
AR
Angelo RosalesJun 25, 2024
Final Answer :
A
Explanation :
An increase in population and demand for haircuts will cause the equilibrium price to increase in the short run. While the typical firm can increase its output to meet the higher demand for haircuts, it will face higher costs due to the law of diminishing returns. As a result, the firm's average total cost will be higher than the equilibrium price, leading to an economic profit. However, in the long run, other firms are likely to enter the market, leading to an increase in the supply of haircuts and a decrease in the price. Therefore, the economic profit earned by the firm will eventually be eroded, and the market will return to long-run equilibrium.
Learning Objectives
- Explain how fluctuations in market demand influence both the price and production levels of a perfectly competitive industry over short and long-term periods.
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