Answered: The hardware industry is perfectly…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The hardware industry is perfectly competitive. Currently the price of a hammer is $5 and there is a balance between the number of hammers purchased and the number of hammers manufactured. However, the minimum average total cost of hammers is $7.50. Which of these scenarios is most likely ?

Select one:

Firms will enter the industry and the price will fall to $4

Firms will enter the industry and the price will stay at $5

Firms will leave the industry but the price will stay at $5

Firms will leave the industry and the price will rise to $7.50

Expert Solution

Step 1: Introduction:

Perfect Competition:

A perfectly competitive market refers to a market structure where both producers and consumers try to maximize their price and utility respectively. This type of market structure results in an equilibrium that is considered Pareto-Optimal. There are several assumptions that one has to consider in such a market structure:

There are a large number of buyers and sellers.
The product is homogenous.
Firms are price takers.
Free entry and exit to and from the market.
No governmental regulation.
There is perfect mobility of factors of production.
Firms have perfect knowledge about the market condition.

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