​In competitive markets, a new firm will enter the market in which of the following situations?​

Correct option is A

In a perfectly competitive market, firms are price takers and long-run entry or exit decisions depend on profitability. The condition for economic profit is that Price (P) exceeds Average Total Cost (ATC). This means that when P > ATC, the firm earns positive economic profits, attracting new firms into the market.

• ATC includes all fixed and variable costs per unit of output.

• When P > ATC, each unit sold generates revenue that exceeds its cost, implying profits.

• These profits act as a signal for entry to other potential firms.

• Entry of new firms continues until profits are driven to zero, which happens when P = ATC in the long-run equilibrium.

Information Booster:

• Perfect competition assumes large number of buyers and sellers, homogenous products, and free entry/exit.

• Economic profits exist when P > ATC, providing an incentive for new firms to enter.

• In the long-run, entry of new firms shifts supply rightward, lowering the price until P = ATC, where firms earn zero economic profits.

• If P = ATC, no entry/exit happens (break-even point).

• If P < ATC, firms incur losses and exit the market.

Additional Knowledge:

(b) P < ATC:
This implies that firms are making losses. Under this situation, existing firms may exit the market rather than new firms entering. Hence, not correct for entry decisions.

(c) P = MC:
While this is a condition for allocative efficiency in perfect competition (in the short-run), it does not determine entry or exit decisions. It tells us that the firm is producing at a level where marginal cost equals market price, but does not indicate profitability.

(d) P = MR = MC:
This is the profit-maximizing condition for all firms (including monopolies), but it does not ensure profit. Even if this condition is met, if P < ATC, the firm could be making losses. Hence, this condition alone is not enough to determine entry decisions.