Suppose that some firms in a competitive industry are earning zero economic profits, while others are experiencing losses. All else equal, in the long run, we would expect the number of firms in the industry to
A. increase.
B. decrease.
C. remain the same.
D. We do not have enough information with which to answer this question.
What would you expect? A business can not operate long at no gain, or continuous losses.
Sra
To determine the expected change in the number of firms in the industry in the long run, we need to consider the behavior of firms in a competitive market.
In a competitive industry, firms can freely enter or exit the market in the long run. If firms are earning zero economic profits, it means that they are covering all their costs but not making any extra profit. On the other hand, if some firms are experiencing losses, it indicates that their costs exceed their revenues.
In the long run, if firms are earning zero economic profits, it implies that the industry is producing at the minimum efficient scale and there are no barriers preventing new firms from entering the market. When new firms enter the market, the overall supply of goods or services will increase, which can lead to downward pressure on prices. As a result, existing firms may experience lower profits or losses.
When firms in a competitive industry face losses, some of them may choose to exit the market. Exiting the market reduces the overall supply, which can lead to higher prices and potentially increase the profitability of the remaining firms. Conversely, if firms in a competitive industry are earning zero economic profits, new firms may enter the market to take advantage of the existing opportunities.
Therefore, based on these considerations, we would expect that in the long run, the number of firms in the industry would increase (option A) if firms are earning zero economic profits, while some firms in the industry are experiencing losses. This increase in firms would continue until economic profits are once again driven down to zero.
Hence, the answer is A. increase.
B. decrease.
In a competitive industry, firms are price takers and are unable to influence the market price. If some firms are earning zero economic profits and others are experiencing losses, it indicates that the average total cost (ATC) of the firms earning zero economic profits is lower than the market price, while the ATC of the firms experiencing losses is higher than the market price.
In the long run, firms have the opportunity to enter or exit the industry. Firms experiencing losses will likely exit the industry since they are unable to cover their costs and make a profit. This will lead to a decrease in the number of firms in the industry.
As the number of firms decreases, the remaining firms will have a larger market share, which may increase their ability to earn economic profits. However, this process of firms exiting the industry will continue until economic profits are driven down to zero, resulting in a smaller number of firms remaining in the long run.