Firms in a competitive market are incurring an economic loss. Choose the stateme

Question

Firms in a competitive market are incurring an economic loss.

Choose the statement that describes what might happen next.

A.

Some firms exit, supply decreases, and the price rises until in the long run all firms are making a positive economic profit. Market output decreases and the output of each remaining firm decreases.

B.

Some firms enter, supply increases, and the price rises until in the long run all firms are making normal profit.

Market output increases and the output of each remaining firm increases.

C.

Some firms exit, supply decreases, and the price rises until in the long run all firms are making normal profit.

Market output decreases and the output of each remaining firm increases.

D.

Some firms enter, supply increases, and the price falls until in the long run all firms are making normal profit.

Market output increases and the output of each remaining firm decreases.

Explanation / Answer

Correct option is (C).

In competitive market, entry and exit are free. So when firms are making loss in short run, some firms exit. It lowers the market supply, so market supply curve shifts left, increasing market price. This continues until all existing firms earn zero economic profit (i.e. they earn only normal profit), and output by each existing firm increases.

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