Final answer:
If the opportunity cost of capital is below the rate of return to capital in the perfectly competitive beauty salon industry, the industry will initially experience high profits. Over time, as new firms enter due to these profits, the increased competition will drive profits down to zero, achieving long-run equilibrium.
Step-by-step explanation:
If the opportunity cost of capital is below the rate of return to capital in the perfectly competitive beauty salon industry, the likely outcome is that the industry will experience high profits. This is because, in the short term, the cost of investing in the industry is lower than the potential returns, which encourages more investment and operations within the sector. However, according to economic theory, in the long run, these abnormal profits will attract new firms into the market, increasing competition and thereby driving profits down towards zero. This is when the market reaches long-run equilibrium; no firm is encouraged to enter or exit the market.
In the scenario where the opportunity cost of capital is below the rate of return, existing firms in the perfectly competitive market will initially see high profits. However, as new firms enter to capitalize on these profits, the increased competition will lead to a reduction in prices and an increase in the total quantity supplied, which will eventually erode these profits over time. This adjustment continues until firms are just covering their average costs, and economic profits are zero.