When firms in a market with free entry and exit have economic profits, then:
A)some companies will exit the market, reducing average company profits.
B)new companies will enter the market, reducing average company profits.
C)some companies will exit the market, raising average company profits.
D)new companies will enter the market, raising average company profits.

Question

Quizplus · Accepted Answer

In a market with free entry and exit, when firms are making economic profits, new companies are attracted to enter the market. This increases competition, which typically leads to a reduction in prices or an increase in costs for all firms, thereby reducing the average company profits over time until economic profits are zero.

When Firms in a Market with Free Entry and Exit