Final answer:
Firms utilize entry and exit decisions to evaluate the profitability of expansion or contraction, focusing on how changes in production affect marginal revenue and cost.
Step-by-step explanation:
Firms use entry and exit decisions in the long run to determine whether expansion or contraction is profitable. To make these decisions, firms observe changes in production and how these impact marginal revenue and marginal cost. If a firm is experiencing profits, it may expand output, open new factories or sales facilities, hire additional workers, or start selling new products. Conversely, in response to losses, a firm may reduce production, close facilities, lay off workers, or cease selling certain products. This strategic behavior is aimed at reaching the point in a perfectly competitive market where the price covers the average cost, hitting the zero-profit equilibrium where the marginal cost curve intersects the average cost curve at its minimum.