Suppose that firms in a perfectly competitive industry are earning economic prof

Question

Suppose that firms in a perfectly competitive industry are earning economic profits. Over time,
A. other firms enter the industry so that the price rises and economic profits fall.
B. some firms leave the industry so that both the price and economic profits rise.
C. other firms enter the industry so that both price and economic profits fall.
D. nothing happens because there are no incentives for change. Suppose that firms in a perfectly competitive industry are earning economic profits. Over time,
A. other firms enter the industry so that the price rises and economic profits fall.
B. some firms leave the industry so that both the price and economic profits rise.
C. other firms enter the industry so that both price and economic profits fall.
D. nothing happens because there are no incentives for change. Suppose that firms in a perfectly competitive industry are earning economic profits. Over time,
A. other firms enter the industry so that the price rises and economic profits fall.
B. some firms leave the industry so that both the price and economic profits rise.
C. other firms enter the industry so that both price and economic profits fall.
D. nothing happens because there are no incentives for change.

Explanation / Answer

Ans)

The correct answer is C.

C. other firms enter the industry so that both price and economic profits fall.

When the prices are higher than the ATC in the short run the firms earn positive economic profits.In the long run, more firms enter the industry this happens until all excess profits have been absorbed by the new entrants and there are zero supernormal profits left.

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