Question

In the short run, if firms in a perfectly competitive market are experiencing economic loss, then in the long run, firms will _____ the market and economic profits will _____.

enter, decrease

enter, increase

exit, decrease

exit, increase

Answer 1

The correct answer is (D) exit, increase

In Long run perfect competitive firms earn 0 economic profit. If firms are facing losses in the short run then firms will start to exit the market and Supply curve will shift to the left and this will continue till there Price becomes equal to the Average Total Cost and hence their loss will start decreasing or there profit will increase and at the end profit becomes equal to 0.

Hence, the correct answer is (D) exit, increase