Question

When entry and exit behavior of firms in an industry does not affect a firm's cost structure,

a. the long-run market supply curve must be horizontal.

b. the long-run market supply curve must be upward-sloping.

c. the long-run market supply curve must be downward-sloping.

d. we do not have sufficient information to determine the shape of the long-run market supply curve.

Answer 1

When entry and exit behavior of firms in an industry does not affect a firm's cost structure,then

a) The long-run market supply curve must be horizontal

The slope of the long-run supply curve depends on what happens to input prices as the industry expands or contracts. The entry and exit of firms do not affect input prices, so the industry Longrun Supply curve is horizontal, or perfectly elastic. Input prices are constant because the input supply curves facing the firm are assumed to be horizontal, or perfectly elastic. New firms can enter the industry and produce at the same AC as the existing firms. Thus, the industry can produce more output at a constant cost.