Final answer:
Firms may not immediately adjust output to close output gaps due to short-run price stickiness and inelastic supply and demand. Only in the long run do firms fully adjust production to market conditions, achieving a long-run equilibrium where no economic profits exist. Hence, the correct answer is option D.
Step-by-step explanation:
Contrary to behavior that would be required to eliminate output gaps, many firms in the economy often exhibit certain patterns in response to market conditions in the short run and long run. In the short run, prices tend to be more volatile than quantities because supply and demand are often inelastic. This means that small shifts in supply or demand can cause relatively large changes in prices. Conversely, in the long run, supply and demand become more elastic, so prices become more stable and quantities adjust more easily. This is reflected in the fact that many firms adjust their prices only periodically and may not change output levels until the long run.
This can be attributed to various market rigidities or strategic decisions by firms. Price stickiness in the short term can lead to temporary disequilibrium states, such as output gaps, where the quantity of output produced is not aligned with the economy's potential output level. Over time, as firms adjust to economic conditions, output levels are modified, leading to a long-run equilibrium where supply equals demand and there are no economic profits in a perfectly competitive market.