Question

Q. If a firm is earning short-run economic profits, in the long run

Group of answer choices

a. firms enter the industry, the market supply curve shifts rightward, and the market price falls.

b. firms exit the industry, the market supply curve shifts rightward, and the market price falls.

c. firms exit the industry, the market supply curve shifts leftward, and the market price falls.

d. firms enter the industry, the market supply curve shifts rightward, and the market price rises.

Answer 1

Answer- Option a. firms enter the industry, the market supply curve shifts rightward, and the market price falls.

If a firm is earning short-run economic profits, then new firms would enter the industry in the long run to earn these economic profits . As new firms enter the industry, the supply of the industry increases and supply curve of the industry shifts to the right.As supply increases with demand unchanged, there would emerge excess supply. As a result firms may begin to sell output at lower price to get rid of excess supply.This causes price to reduce.  The rightward shift of the supply curve with an unchanged demand curve causes the market price to fall.

Option b. is incorrect because firms would not exit the industry in the long run when firms make economic profits in the short run. The firms exit in the long run when existing firm incur losses in the short run.

Option c. is incorrect because firms would not exit the industry in the long run when firms make economic profits in the short run. Short run economic profits attract new firms to enter the industry and earn these economic profits.

Option d. is incorrect because when new firms would enter the industry, the market supply curve will shift to the  right and the the market price would fall and not rise. As supply increases with demand unchanged, there would emerge excess supply. As a result firms may begin to sell output at lower price. This causes price to fall.