Question

Assume a competitive industry is in long-run equilibrium and firms in the industry are earning normal profits. Now assume that production technology improves such that average total costs decline by $5 per unit. How will the industry move to a new long-run equilibrium?

a. The fall in costs will result in economic profits and firms will enter the market causing the price to fall until all firms only have normal profits.

b. The new long-run equilibrium will be where each firm now has a normal profit plus $5.

c. Entry will occur and the market price will fall, but there will be so much entry into the market that firms will have losses.

d. It will not move to a new long-run equilibrium. New firms will enter the market, which will increase the price for that good and the long-run equilibrium will remain the same.

Answer 1

a. The fall in costs will result in economic profits and firms will enter the market causing the price to fall until all firms only have normal profits.

Explanation :

In long run perfectly competitive firm earns zero economic profit ( normal profit). So when cost will decrease firm will earn positive economic profit. So when there is positive economic profit, new firm have incentive to enter the market. When new firms enter the market supply will shift to the right and price will decrease and in long run all firms will earn zero economic profit (normal profit).