In a competitive industry, entry and exit decisions:
A) allow some firms to earn above-normal profits in the long run.
B) ensure that labor and capital move across industries to optimally balance production.
C) rely on demand signals, not price signals.
D) move capital and labor away from profitable industries in order to maximize the total value of production.

Question

Quizplus · Accepted Answer

In a competitive industry, entry and exit decisions ensure that labor and capital move across industries to optimally balance production. This means that firms that cannot compete in the market will exit, while new entrants will introduce new ideas and products, thus increasing competition and driving down profits. This process ensures that resources are efficiently allocated across the economy. Therefore, option B is the most appropriate choice. Options A and D are incorrect as the process of entry and exit ensures that firms cannot earn above-normal profits in the long run, and resources are only moved away from unprofitable to profitable industries to maximize efficiency. Option C is also incorrect because price signals are an essential part of the demand signals that firms rely on to make entry and exit decisions.

In a Competitive Industry, Entry and Exit Decisions