In a market that is characterized by free entry and exit, profit serves the function of drawing new firms into the industry when it is greater than normal and causing some firms to leave when it is less than normal.

Question

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In a market with free entry and exit, potential profits attract new firms while lower than normal profits cause firms to exit the industry. This is a key mechanism for maintaining equilibrium in the long run.

In a Market That Is Characterized by Free Entry and Exit