A government subsidy would allow all firms in a competitive constant-cost industry to earn a positive profit in the long run.

Question

Quizplus · Accepted Answer

In a competitive constant-cost industry, long-run equilibrium is achieved when firms earn zero economic profit, as any positive profit would attract new entrants until profits are driven back to zero. A subsidy might temporarily allow firms to earn a positive profit, but as new firms enter the market attracted by these profits, the supply curve shifts right, lowering the price until profits are again zero.

A Government Subsidy Would Allow All Firms in a Competitive