Author Question: Describe the process by which the competitive market establishes a price at which all firms are just ... (Read 57 times)

TVarnum · **on:** Jul 1, 2018

Describe the process by which the competitive market establishes a price at which all firms are just earning normal profits.

What will be an ideal response?

Question 2

Joe's demand for spring water can be represented as p = 10 - Q (where p is measured in /gallon and Q is measured in gallons). He recently discovered a spring where water can be obtained free of charge. His consumer surplus from this water is

A) 0.
B) 50.
C) 100.
D) unknown based upon the information provided.

momtoalll · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

Above normal profits will entice new firms to enter the industry, thereby driving down market price and firm profits until they reach the normal level, after which no additional firms enter the industry. Below normal profits will cause some firms to exit the industry, thereby raising market price and firm profits until the normal level is reestablished, and no further firms exit the industry.

Answer to Question 2

B