Final answer:
If fixed costs increase in a competitive market in long-run equilibrium, firms will exit the market because economic profits have decreased, leading to a long-run adjustment where the market returns to a zero-profit equilibrium.
Step-by-step explanation:
Assume that competitive firms and a competitive market are in long-run equilibrium. What will happen in the long run if fixed costs increase? Firms will exit; because economic profits have decreased. The correct answer is C.Exit; decreased. In a perfectly competitive market, firms are in long-run equilibrium when they make no economic profit—meaning their total revenue equals their total cost, including both variable and fixed costs.
If fixed costs increase for any reason, such as rent or salaries, firms' average costs will rise. As a consequence, firms will no longer be covering all their costs at the previous market price, leading to economic losses. Firms will react to these losses by exiting the market in the long run. Through this process of exit, the market supply will decrease, and the market price will adjust until the remaining firms can again cover their costs, and the zero-profit equilibrium is restored.