Refer to Figure 14-2. If the market price is \$6, what will happen in the market in the short run?

• A. The market will immediately reach a new long-run equilibrium.
• B. Firms will incur losses, causing some firms to exit the market.
• C. Firms will earn positive economic profit, attracting new firms to enter the market.
• D. Firms will earn zero economic profit and there will be no incentive for entry or exit.

Answer: (C)

Verified step by step guidance

1. Identify the market structure depicted in Figure 14-2 (typically a perfectly competitive market) and understand that the short-run equilibrium depends on the relationship between market price and firms' average total cost (ATC).
2. Determine the firm's cost curves at the given price of \$6, specifically the Average Total Cost (ATC) and Marginal Cost (MC) at the profit-maximizing output level where \(P = MC\).
3. Compare the market price (\$6) to the firm's ATC at the profit-maximizing quantity: if \(P > ATC\), the firm earns positive economic profit; if \(P = ATC\), zero economic profit; if \(P < ATC\), the firm incurs losses.
4. Analyze the short-run implications: if firms earn positive economic profit, this creates an incentive for new firms to enter the market, increasing supply and eventually driving the price down in the long run.
5. Conclude that in the short run, firms earning positive economic profit will attract entry, but the market will not immediately reach a new long-run equilibrium; instead, entry will shift supply and affect prices over time.