In the long run under perfect competition, the equilibrium price is determined at the level where it is equal to which of the following?
Answer & explanation
Correct answer: option 2
The correct answer is option 2: AC
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In the long run under perfect competition, equilibrium is achieved when: Price = Average Cost (AC)
This is because:
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Firms enter or exit the market freely.
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Long-run equilibrium occurs where firms make normal profit (zero economic profit).
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At this point, Price = AR = MR = MC = AC, but AC is the key cost condition that determines equilibrium price.
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Why not the other options?
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Option 1 (AR): AR is equal to price, but does not determine it. The question asks where the price is determined.
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Option 3 (AVC): Relevant only in short-run shutdown decisions, not in long-run equilibrium.