Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If the market supply curve is given by S1, then in the long run firms will:
A)enter the market, leading the market supply curve to shift out to S3.
B)enter the market, leading the market supply curve to shift out to S2.
C)exit the market, leading the market supply curve to shift out to S2.
D)neither enter nor exit the market, so the market supply curve will remain at S1.

Question

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive.  If the market supply curve is given by S1, then in the long run firms will:
A)enter the market, leading the market supply curve to shift out to S3. 
B)enter the market, leading the market supply curve to shift out to S2. 
C)exit the market, leading the market supply curve to shift out to S2. 
D)neither enter nor exit the market, so the market supply curve will remain at S1.

Quizplus · Accepted Answer

If the market supply curve is given by S1, then the equilibrium price will be $15. At that price, all firms in the market earn an economic profit, prompting new firms to enter the market in the long run. Entry will continue until all firms in the market are earning zero economic profit. As a result, the market supply curve will shift from S1 to S2.

Assume That All Firms in This Industry Have Identical Cost