Which of the following statements is correct?
A) Economic profits induce firms to enter an industry; losses encourage firms to leave.
B) Economic profits induce firms to leave an industry; profits encourage firms to leave.
C) Economic profits and losses have no significant impact on the growth or decline of an industry.
D) Normal profits will cause an industry to expand.

Question

Quizplus · Accepted Answer

Economic profits are a signal to potential entrants that there are profits to be made in an industry. This induces new firms to enter the industry and competition increases, thus lowering prices and decreasing profits. On the other hand, losses indicate that the industry is not profitable and firms will leave in search of more profitable opportunities.

Which of the Following Statements Is Correct