The correct effect of a decrease in demand in a long-run competitive equilibrium is that equilibrium (market) quantity falls. Firms will adjust their production to reach a new equilibrium with zero economic profits, with no price increase, output increase, or new firms entering.
To answer the student's question about the effect of a decrease in demand on a market in long run competitive equilibrium: E. equilibrium (market) quantity falls is the correct option. In a perfectly competitive market in long-run equilibrium, firms earn zero economic profits, as any positive economic profits would attract new entrants and excess profits would be competed away. If demand decreases, firms will eventually reduce production to return to the new equilibrium where the market price again equals the minimum of average cost, and economic profits are zero. Firms will not earn positive economic profits, nor will they increase their output (q*) or attract new entrants due to the decrease in demand.