The existence of positive profits in a perfectly competitive industry ________.
A) provides an incentive for firms to increase their price
B) encourages new firms to enter the industry
C) encourages firms to increase their supply
D) signals that the price has reached its long-term level

Question

Quizplus · Accepted Answer

Positive profits in a perfectly competitive industry indicate that there is an opportunity for new firms to enter the market and compete for those profits. This increased competition would eventually lead to a decrease in price, eroding those profits back down to zero in the long run. Therefore, the existence of positive profits encourages new firms to enter the industry.

The Existence of Positive Profits in a Perfectly Competitive Industry