Question

If all firms in a perfectly competitive industry earn zero economic profits, in the long run, the:

Select one:

a. industry supply curve will shift to the right.

b. number of firms in the industry will decrease.

c. number of firms in the industry will increase.

d. industry supply curve will not shift.

Answer 1

Suppose each firm earns zero economic profit, then in the long run no new firm will enter as they can see that no firm is earning positive profit and thus there is no need to enter. Similarly no firm will exit the market because they can see that till now they are not incurring any loss and hence will stay in the market.

Thus no new firm will enter or exit and hence number of firm will remain same and thus industry supply curve will remain same. Hence option (d) is the correct answer.

Hence, the correct answer is (d) industry supply curve will not shift.

{Note : In the long run supply curve shifts if either new firm enters or exits. New firm enters if firms are earning positive profit and existing firm exits if firms are incurring a losses. Thus option (a), (b) and (c) are incorrect.}