Question

1. industries in which firms suffer losses are likely to _______ in the long-run.

A. Expand

b. expand or contract depending on the normal rate of return

C. Contract

D. neither expand or contract, as Firms must earn an economic profit to stay in business

Answer 1

Answer. (c) contract

Explanation: An industry consists of many firms. Now if the firms are suffering losses in the industry, their investors/owners would look to shift their money to other productive opportunities where positive returns can be made. So gradually they will start withdrawing their resources and exit the industry. This process will keep continuing until in the long run the optimum number of firms are left in the industry so that it stops making losses and possibly breaks even. Thus in the long run, the number of firms decreases and hence the industry contracts.

A similar and opposite situation would be if a industry was making profits. Then the industry would expand in the long run.