Question

Assume that competitive firms and a competitive market are in long-run equilibrium. What will happen in the long run as a result of that increase in variable costs in the previous question? Firms will ______________ because profits have ______________.

A.Enter; decreased
B.Enter; increased
C.Exit; decreased
D.Exit; increased

Answer 1

In the long run, firms will respond to profits through entry and to losses through exit. The price level in a competitive market will move towards the zero-profit point.

Step-by-step explanation:

In the long run, firms will respond to profits through a process of entry, where existing firms expand output and new firms enter the market. Conversely, firms will react to losses in the long run through a process of exit, in which existing firms cease production altogether. Through the process of entry in response to profits and exit in response to losses, the price level in a perfectly competitive market will move toward the zero-profit point, where the marginal cost curve crosses the AC curve at the minimum of the average cost curve.