Refer to Figure 16-2. Which of the following will occur in the long run in this industry?

• A. The market price will remain above average total cost due to barriers to entry.
• B. Firms will enter the industry until economic profits are zero.
• C. Firms will continue to earn positive economic profits indefinitely.
• D. Firms will exit the industry until prices rise above average total cost.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of long-run equilibrium in a perfectly competitive industry. In the long run, firms can enter or exit the market freely, which affects supply and market price.
2. Step 2: Recall that economic profit is defined as total revenue minus total cost, including opportunity costs. Positive economic profits attract new firms, while losses cause firms to exit.
3. Step 3: Recognize that in the long run, the entry and exit of firms drive the market price to the point where it equals the minimum average total cost (ATC), resulting in zero economic profit for all firms.
4. Step 4: Analyze the given options in light of this principle: if firms are earning positive economic profits, new firms will enter, increasing supply and lowering price until profits are zero; if firms are incurring losses, some will exit, reducing supply and raising price until losses are eliminated.
5. Step 5: Conclude that the correct long-run outcome is that firms will enter the industry until economic profits are zero, which aligns with the principle of zero economic profit in long-run equilibrium in competitive markets.