Question

All 47% The market for watches is perfectly competitive and is currently in equilibrium. What will ha among college students? Choose one: o

A. In the short run, firms will incur economic losses, but in the long run, firms will enter the market. bringing economic profits back down to zero. O
B. In the short run, firms will experience economic profits, but in the long run, firms will leave the market. bringing economic profits back down to zero.
c. In the short run, firms will incur economic losses, but in the long run, firms will leave the market, bringing economic profits back down to zero. O
D. In the short run, firms will experience economic profits, but in the long run, firms will enter the market. bringing economic profits back down to zero. O
E. In both the short run and the long run, firms will experience zero economic profits. K12/15 >

Answer 1

The correct answer is Option D, where firms will initially experience economic profits due to increased demand, but in the long run, new firms will enter the market, driving profits back to zero and restoring long-run equilibrium.

Step-by-step explanation:

In the context of a perfectly competitive market that is currently in equilibrium, the correct response to what would happen if the demand for watches suddenly increased among college students is Option D: In the short run, firms will experience economic profits, but in the long run, firms will enter the market, bringing economic profits back down to zero.

This is because in the short run, the existing firms will benefit from the higher prices, leading to economic profits. However, these profits signal new firms to enter the market, which increases supply and drives the price down. In the long run, this process will continue until the market returns to a long-run equilibrium with firms earning zero economic profits, where no new firms want to enter the market and existing firms do not want to leave.