Free exit implies that
A) a perfectly competitive firm can never earn a profit.
B) if an industry's existing firms make excessively high losses, firms are likely to exit the industry.
C) the government regulates the number of firms it allows in an industry.
D) firms will always earn below normal profit, as firms can exit the industry at any time they like.

Question

Quizplus · Accepted Answer

Free exit refers to the ability of firms to leave an industry without facing significant barriers or costs. When existing firms in an industry incur excessively high losses, it becomes unsustainable for them to continue operating, leading to their exit from the industry. This mechanism helps to balance the market by reducing supply, potentially leading to a restoration of market equilibrium. Choices A, C, and D misinterpret the concept of free exit and its implications on profitability, regulation, and earnings.

Free Exit Implies That