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Question

The long-run average costs at the efficient scale of production for 6 firms in a market are given below.

FirmLRACminA10B15C13D18E17F12

The market price fell from Rs 20 to Rs 15. As a result ________


  1. the market supply curve shifts towards the left

  2. the market supply curve shifts towards the right

  3. there won't be any shift in the market supply curve

  4. none of these


Solution

The correct option is A

the market supply curve shifts towards the left


When the market price falls from Rs 20 to Rs 15, firms D and E exit the market as the long run exits condition is met. As a result, the market supply curve shifts towards the left. 

Note: We discussed that supply curve doesn't shift when price changes. This is true only in cases where there are a large number of sellers and their cost curves are similar. In most real markets with perfect competition, this is usually the case. The entry or exit of a few sellers does not have a marked impact on the supply curve.

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