Assume firms in an increasing-cost industry are currently making profits.Which of the following statements describes what will happen in the long run?

Question

Quizplus · Accepted Answer

In an increasing-cost industry, the entry of new firms will cause the price of inputs to increase, leading to higher production costs and a higher LRAC curve for each individual firm. As more firms enter the industry and demand more inputs, the price of inputs will continue to rise, causing the industry supply schedule to shift to the right but also causing each firm's LRAC curve to shift up. Thus, in the long run, the industry supply will increase and the price will decrease, but profits will be eroded for all firms, so they will not be making profits in the long run.

Assume Firms in an Increasing-Cost Industry Are Currently Making Profits