**Understanding Perfect Competition: Cost Curves and Market Entry****7.2.4** Refer to the figure below for a perfectly competitive producer.In the diagram, we have cost curves against quantity produced for a firm in a perfectly competitive market:- **MC (Marginal Cost)**: This curve represents the additional cost of producing one more unit. It typically slopes upwards.- **ATC (Average Total Cost)**: This curve is U-shaped, indicating that costs per unit decrease, reach a minimum point, and then start increasing as more units are produced.- **AVC (Average Variable Cost)**: This curve is also U-shaped and lies below the ATC curve, representing the variable costs per unit.**Price and Cost Levels:**- A horizontal line at **$5** indicates a potential market price.- Another horizontal line at **$4** suggests a lower price level.**Question:**The firm would attract new entrants into the industry if the price is:- $ \circ $ anywhere below $5.- $ \circ $ below $5 but above $4.- $ \circ $ below $4.- $ \circ $ above $5.Considerations:New entrants are likely attracted if the market price is above the ATC, as this ensures profit. If the price is only above AVC but below ATC, firms may not cover all costs in the long run.

normal-profits are defined as the profits that are required by the firm to break even and continue…

Answered: The firm would attract new entrants…

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The firm would attract new entrants into the industry if the price is

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

**Understanding Perfect Competition: Cost Curves and Market Entry**

**7.2.4** Refer to the figure below for a perfectly competitive producer.

In the diagram, we have cost curves against quantity produced for a firm in a perfectly competitive market:

- **MC (Marginal Cost)**: This curve represents the additional cost of producing one more unit. It typically slopes upwards.
- **ATC (Average Total Cost)**: This curve is U-shaped, indicating that costs per unit decrease, reach a minimum point, and then start increasing as more units are produced.
- **AVC (Average Variable Cost)**: This curve is also U-shaped and lies below the ATC curve, representing the variable costs per unit.

**Price and Cost Levels:**
- A horizontal line at **$5** indicates a potential market price.
- Another horizontal line at **$4** suggests a lower price level.

**Question:**
The firm would attract new entrants into the industry if the price is:

- $ \circ $ anywhere below $5.
- $ \circ $ below $5 but above $4.
- $ \circ $ below $4.
- $ \circ $ above $5.

Considerations:
New entrants are likely attracted if the market price is above the ATC, as this ensures profit. If the price is only above AVC but below ATC, firms may not cover all costs in the long run.

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