Question

A)-For a perfectly competitive industry, as long as an economic profit is attainable, new firms will enter the market.

True

False

B)- If firms in an industry are experiencing economic losses, firms will ______ the industry and the price of the good will ______.

enter; decrease

enter; increase

leave; increase

leave; decrease

Answer 1

1)

for a perfectly competitive market, in the long-run each firm will earn normal profit i.e. economic profit will be zero. hence in the long-run price will be equal to the minimum of the average cost.

If price is greater than the average cost there will be positive economic profit & hence new firms will enter because now the new firms have positive incentive to enter to the market.

as a result market supply will increase. And they will enter till they fully exhaust the positive economic profit and once again the price will be equal to AC.

Hence the statement is true that as long as economic profit is attainable new firm will enter the market.

2)

As positive economic profit lead to entry of new firms, similarly economic loss will lead to exit of few firms in the long-run. this will happen when P < AC.

this exit of firm will lead to a decline in the market supply of the good & hence as a result price will increaseagain reach to the minimum of AC.

Hence the correct answer is:--------- leave, increase