Problem 40 When an industry is in long-run ... [FREE SOLUTION]

Chapter 21: Problem 40

When an industry is in long-run equilibrium economic profits are and will be entering or leaving the industry. (LO5) a) zero, some b) zero, none c) positive, some d) positive, none

Short Answer

Expert verified

The correct answer is option b) zero economic profit, none entering or leaving. This is the condition that describes a long-run equilibrium in an industry.

Step by step solution

Option a: zero economic profit, some firms entering or leaving

In a long-run equilibrium, firms in a competitive market have zero economic profit. If there are firms entering or leaving the industry, it means the market has not reached equilibrium yet. This option does not fit the concept of long-run equilibrium.

Option b: zero economic profit, no firms entering or leaving

In a long-run equilibrium, firms in a competitive market have zero economic profit. Zero economic profit means that firms are making revenue equal to their costs, and therefore are not incentivized to change their production (no excess profit or loss). If no firms are entering or exiting the industry, it means the market has reached equilibrium. This option fits the concept of long-run equilibrium.

Option c: positive economic profit, some firms entering or leaving

If there are positive economic profits in the industry, this would incentivize new firms to enter the market, driving down prices and profits for existing firms. This is not a long-run equilibrium, as the dynamics of the market are still changing and the market has not reached a stable point yet.

Option d: positive economic profit, no firms entering or leaving

Positive economic profits with no firms entering or leaving the industry is not a long-run equilibrium, as the presence of positive profits would eventually attract new firms to enter the market, causing prices and profits to decrease for existing firms in the long run. Based on the analysis of each option, we can select the correct answer.

Correct answer

The correct answer is option b) zero economic profit, none entering or leaving. This is the condition that describes a long-run equilibrium in an industry.