If perfectly firms are earning an economic profit, then a. the market is in its

Question

If perfectly firms are earning an economic profit, then


a. the market is in its long-run equilibrium.

b. new firms enter the market and the equilibrium profit of the firms already in the market decreases.

c. firms exit the market and the economic profit of the surviving firms in the market increases.

d. new firms enter the market and the equilibrium profit of the firms already in the market increases.

e. firms exit the market and the economic profit of the surviving firms in the market decreases.

Explanation / Answer

If perfectly competitive firms are earning an economic profit, then this fact will attract new firms to the industry. As more and more firms enter the industry, the market supply curve shifts to the right, forcing the price lower and lower until the industry is in equilibrium and no firms earn an economic profit. Thus, the answer is b.

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