Suppose that all firms in a perfectly competitive industry are experiencing economic profits.One can predict that
A) market supply will decrease.
B) the number of firms will rise.
C) market demand will increase.
D) the market price will rise.
E) the quantity supplied will decrease.

Question

Quizplus · Accepted Answer

Economic profits in a perfectly competitive industry attract new firms to enter the market in search of profits, increasing the number of firms. This increase in competition will eventually decrease profits to zero in the long run. None of the other options are correct because economic profits (above normal profits) signify that there is excess demand for the product, which would lead to an increase in market supply, not decrease. Additionally, market demand would not necessarily increase just because firms are experiencing economic profits. The market price will not rise because each firm in a perfectly competitive industry is a price taker, meaning they have no control over the market price. The quantity supplied may increase or decrease depending on the actions of firms, but it is not a necessary outcome of economic profits.

Suppose That All Firms in a Perfectly Competitive Industry Are