Question

What happens in the long run if the government limits entry into a market that was perfectly competitive? The supply curve is flat Cannot be determined from the information The supply curve is upward sloping Firms earn zero profit The supply curve shifts to the right

Answer 1

Usually the longrun aggregate supply curve is upward sloping because as the price increases the existing firms and the new firms entering into the market demand more inputs which will cause higher input prices. Thus each additional output can be produced with a higher marginal cost. Thus the longrun aggregate supply is upward sloping. If the government limits the entry of new firms into the industry, the existing firm can produce additional output without an increase in marginal cost. Therefor in a perfectly competitive industry where the government limits the entry of firms, the longrun aggregate supply curve will be horizontal.

A. the supply curve is flat.