When firms in a competitive industry with low barriers to entry are earning posi

Question

When firms in a competitive industry with low barriers to entry are earning positive economic profits

3.  

When firms in a competitive industry with low barriers to entry are earning positive economic profits

A.  none of the above B.  firms will neither enter nor exit the industry C.  new firms will enter the industry and the market price will fall until firms are earning only a normal rate of return. D.  firms will exit the industry and market price will rise until firms are earning only a normal rate of return

Explanation / Answer

When firms in a competitive industry with low barriers to entry are earning positive economic profits, new firms will enter the industry and the market price will fall until firms are earning only a normal rate of return. Economic profits will attract entry of more firms and more supply of goods in the market. Increased supply will lower the price in the market. This process will continue until the price is equal to ATC, so that the firms are only earning normal profits.

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