Assume a decreasing-cost perfectly competitive industry. Which of the following statements is true?

• A. Entry of new firms causes input prices to rise.
• B. Long-run industry supply curve is downward sloping.
• C. Market price increases as industry output expands.
• D. Firms earn positive economic profits in the long run.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the characteristics of a decreasing-cost industry. In such an industry, as the total output increases, the input prices tend to fall or remain constant, leading to lower costs for firms.
2. Step 2: Recall that in a perfectly competitive market, firms are price takers and will enter or exit the market until economic profits are zero in the long run.
3. Step 3: Analyze the effect of entry of new firms on input prices. In a decreasing-cost industry, entry of new firms does not cause input prices to rise; instead, input prices tend to decrease or stay stable due to economies of scale or technological improvements.
4. Step 4: Consider the shape of the long-run industry supply curve. Because costs decrease as output expands, the long-run supply curve slopes downward, reflecting lower prices at higher quantities.
5. Step 5: Evaluate the implications for market price and profits. Market price typically decreases or remains stable as output expands, and firms earn zero economic profits in the long run due to free entry and exit.