Multiple Choice
Which scenario is most likely to cause firms to exit a perfectly competitive industry?
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11. Perfect Competition
Long Run Entry and Exit Decision
Multiple Choice
How does entry and exit affect long-run profits in perfect competition?
A
Entry and exit adjust output until price equals average variable cost, so firms break even at that level in the long run.
B
Entry increases industry profits by expanding market share and allowing firms to earn higher long-run profits.
C
Entry and exit eliminate economic profits so in the long run firms earn zero economic profit (price = minimum average total cost).
D
Entry and exit have no effect on long-run profits; profits are determined solely by firms' costs and demand.
Verified step by step guidance1
Understand the concept of long-run equilibrium in perfect competition, where firms can freely enter or exit the market based on profitability.
Recognize that if firms are earning positive economic profits, new firms will enter the market, increasing supply and driving the market price down.
Conversely, if firms are incurring losses (negative economic profits), some firms will exit the market, reducing supply and causing the market price to rise.
This process of entry and exit continues until economic profits are eliminated, meaning firms earn zero economic profit, where price equals the minimum point of average total cost (P = min ATC).
Conclude that in the long run, entry and exit ensure that firms break even, and no firm earns economic profits, stabilizing the market price at the minimum average total cost.
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