In competitive markets, low-cost leaders who have the lowest industry costs are likely to:

• A. earn economic profits in the short run until entry drives profits to zero
• B. face higher barriers to entry compared to other firms
• C. be unable to influence market supply or price
• D. set prices above the market equilibrium to maximize profits

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the nature of a competitive market, where many firms sell identical products, and no single firm can influence the market price. Firms are price takers, meaning they accept the market equilibrium price determined by supply and demand.
2. Step 2: Recognize that low-cost leaders have the lowest production costs in the industry, which allows them to earn positive economic profits in the short run because their costs are below the market price.
3. Step 3: Recall that in the short run, economic profits attract new firms to enter the market, increasing supply and driving the market price down.
4. Step 4: Understand that as new firms enter, the increased supply pushes the price down until economic profits are eliminated, and firms earn zero economic profit in the long run (normal profit).
5. Step 5: Conclude that low-cost leaders will earn economic profits only in the short run, but in the long run, entry of new firms will drive profits to zero, consistent with competitive market theory.