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2. True, false or uncertain. (Explain your answer.) "If firms in competitive industries lower their costs,...

2. True, false or uncertain. (Explain your answer.)

"If firms in competitive industries lower their costs, profits will not be altered, since in competition all firms earn zero profits. Therefore, competitive firms have no incentive to find new ways of lowering costs."

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Answer #1

The statement is false.

It is true that no competitive firm is able to earn any economic profit in the long run. But at the same time it is also true that if one firm can reduce its cost then the price does not change and therefore it can earn economic profit in the short run. Whenever firms are making economic decisions, in a competitive Environment they obviously consider both the short run and long run impacts of the economic decision. They realise that if they are able to reduce the cost of production then they will be able to earn economic profit in the short run because price will be remaining the same as it is determined by the market and not the firm itself.

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