Question

Suppose the price at which the equilibrium is attained in exercise 5 is above the minimum average cost of the firms constituting the market. Now if we allow for free entry and exit of firms, how will the market price adjust to it?

Answer 1

Answer:

It shows that the firm is earning a lot of profit which is above normal. It attracts new firms, eventually, the prices go down equal to the minimum average cost and the firm earns normal profits after that.

Explanation:  

This situation will bring in new firms and the supply of output also goes up. The new firms keep entering the market, eventually the prices will fall till it becomes equal to the minimum average cost. During this stage, the firms will then start to have normal profits.