Question

9. State whether the following is True, False or Uncertain. Explain. In the long run, firms...

9. State whether the following is True, False or Uncertain. Explain.

In the long run, firms will exit an industry in which they are incurring losses.

Homework Answers

Answer #1

True.

  • In long run, firms will exit an industry in which they are incurring losses.
  • A perfectly competitive market earns more profit in short run when existing firms maximize their profit by selling goods at a point where marginal cost equals the marginal revenue.
  • During this time, new firms get more incentives to enter into that market as it is making more profit. This will increase the supply and the firms are forced to reduce their prices due to surplus of goods.
  • This will lead to losses in the market and the firms are forced to exit the Industry in long run.
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