Suppose firms in a perfectly competitive industry are making economic profits. As a result,
I. new firms enter the industry.
II. the market price falls.
III. the economic profits of the existing firms decrease.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, if firms are making economic profits, new firms will enter the industry due to low barriers to entry and the attraction of profits (I). This increase in supply leads to a decrease in the market price (II), which in turn reduces the economic profits of the existing firms as the price moves closer to the average cost (III).

Suppose Firms in a Perfectly Competitive Industry Are Making Economic