The market price rises to $65. The firm's marginal cost reaches $65 at six units, where average total cost is $50. What happens next in a market with free entry?

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Question

The market price rises to $65. The firm's marginal cost reaches $65 at six units, where average total cost is $50. What happens next in a market with free entry?

Accepted Answer

It earns $90 supernormal profit, which attracts entry until price falls back to $47 — Award 1 mark. Working: 6 × ($65 − $50) = $90. Entry raises market supply, lowering price until only normal profit remains.

Answer

Nothing changes, since price above marginal cost is sustainable

Answer

It makes a loss, since average total cost has risen to $50

Answer

It earns $90 supernormal profit, which attracts entry until price falls back to $47

Answer

It earns $90 supernormal profit, which persists because the firm is efficient

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