Figure 14-13
Suppose a firm in a competitive industry has the following cost curves:
-Refer to Figure 14-13. If the price is $3.50 in the short run, what will happen in the long run?
A)Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry.
B)Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry.
C)Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry.
D)Because the price is below the firm's average variable costs, the firms will shut down.

Question

Figure 14-13
Suppose a firm in a competitive industry has the following cost curves: 
-Refer to Figure 14-13. If the price is $3.50 in the short run, what will happen in the long run?
A)Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry. 
B)Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry. 
C)Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry. 
D)Because the price is below the firm's average variable costs, the firms will shut down.

Quizplus · Accepted Answer

At a price of $3.50, the firm is earning positive profits in the short run. However, in the long run, other firms will be enticed to enter the industry because of these profits. This will increase industry supply and lower the market price, causing individual firms to earn negative economic profits. Some firms will likely exit the industry in response to these losses. Therefore, the answer is C.

Figure 14-13 Suppose a Firm in a Competitive Industry Has the Following