Question

Assume that the market for cage-free eggs is perfectly competitive. All else equal, as more farmers choose to produce and sell cage-free eggs, what is likely to happen to the equilibrium price of the eggs and profits of these farmers in the long run?

Answer 1

Price will fall and profits will be reduced.

Step-by-step explanation:

In perfect competition there is no restriction on entry and exit of firms in the market. In the short run the existing farmers may be earning economic profits. This will encourage other firms to join.

As more farmers choose to produce, the supply of eggs in the market will increase, shifting the industry supply curve to the right.

As there will be excess supply, the price level will fall. Reduction in price will cause the profits to get reduced.

The farmers will continue to produce till price falls to the level where there is zero economic profits.

if price falls below that level, the firms incurring losses will exit the market.