Suppose the price at which equilibrium is attained in exercise 5 is above the minimum average cost of the firms constituting the market. Now if we allow for free entry and exit of firms, how will the market price adjust to it?
If price is above the minimum AC of the firms, then this firm will earn super-normal profits. New firms will be attracted to enter which will result in a fall in prices till all firms charge a price equal to minimum AC.
