Assertion (A): With free entry and exit, a rightward shift of the demand curve raises the equilibrium price above the minimum average cost of the firms.
Reason (R): When firms earn supernormal profit, new firms enter the market and the price falls back to the minimum average cost.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A) is false but (R) is true.
Assertion (A): With free entry and exit, a rightward shift of the demand curve raises the equilibrium price above the minimum average cost of the firms. — False. With free entry, a rightward demand shift raises the price only for a while. New firms enter and the price returns to min AC; only the quantity and the number of firms rise.
Reason (R): When firms earn supernormal profit, new firms enter the market and the price falls back to the minimum average cost. — True. Supernormal profit draws new firms in. Supply rises and the price falls back to min AC.
NCERT (2026-27): “Shifts in Demand … Now suppose the demand curve shifts to the right for some reason. At p0 there will be excess demand for the commodity. Some dissatisfied consumers will be willing to pay higher price for the commodity, so the price tends to rise. This gives rise to a possibility of earning supernormal profit which will attract new firms to the market. The entry of these new firms will eventually wipe out the supernormal profit and the price will again reach p0. Now higher quantity will be supplied at the same price. From the panel (a), we can see that the new demand curve DD1 intersects the p0 = minAC line at point F such that the new equilibrium will be (p0, q1) where q1 is greater than q0. The new equilibrium number of firms n1 is greater than n0 because of the entry of new firms.” “Summary … With free entry and exit, the shift in demand has no impact on equilibrium price but changes the equilibrium quantity and number of firms in the same direction as the change in demand.” |