Final answer:
In a perfectly competitive market with constant returns to scale, positive economic profits attract new firms, increasing industry output and competition. This leads to a decrease in price until profits reach zero and a new long-run equilibrium is established, where each existing firm's quantity produced will decrease.
Step-by-step explanation:
In the long run, in a perfectly competitive market with constant returns to scale:
the scenario where all firms are currently earning positive economic profits will lead to changes. New firms will be attracted by these profits and will enter the market, increasing the industry's output and thereby leading to more competition. As a result, the market price will decrease until economic profits reach zero, and a new long-run equilibrium is achieved, where P = MR = MC = AC, and firms earn normal profits.
Existing firms will adjust their output levels to the new equilibrium price, and if firms are experiencing constant returns to scale, this implies that input costs remain constant as output increases, ensuring that average total costs do not change as firms adjust their production. Consequently, the correct answer to the student's question is that (c) The quantity produced by each existing firm will decrease, leading to a new equilibrium where no firm has an incentive to enter or leave the market.