Question

In the long run, how do firms typically respond to profits?

a) Increase production
b) Maintain current output
c) Exit, reducing output or ceasing production
d) Seek government intervention

Answer 1

In the long run, firms typically respond to profits by increasing production and expanding their output. On the other hand, they respond to losses by reducing production or even exiting the market altogether. This helps maintain a long-run equilibrium and drives economic profits down to zero.

Step-by-step explanation:

In the long run, perfectly competitive firms will respond to profits by increasing production and expanding their output. This is because profits serve as an incentive for firms to expand their operations and capture a larger market share. On the other hand, firms will respond to losses by reducing production or even exiting the market altogether. By doing so, firms aim to cut their losses and avoid further financial decline.

By increasing production and expanding their output in response to profits, firms contribute to increased competition in the market. This increased competition eventually leads to a long-run equilibrium, where no new firms want to enter the market and existing firms do not want to leave. At this equilibrium point, economic profits are driven down to zero.