Assume that the market for soybeans is purely competitive. Currently, firms growing soybeans are earning positive economic profits. In the long run, we can expect
A) new firms to enter, causing the market price of soybeans to fall.
B) new firms to enter, causing the market price of soybeans to rise.
C) some firms to exit, causing the market price of soybeans to fall.
D) some firms to exit, causing the market price of soybeans to rise.

Question

Quizplus · Accepted Answer

In the long run, when firms in a purely competitive market are earning positive economic profits, new firms will enter the market attracted by the profits. This will increase the supply of soybeans, causing the market price of soybeans to fall. Therefore, choice A is the correct answer. The entry of new firms will lead to an increase in competition, which will squeeze the profits of existing firms. Some firms may exit the market to avoid losses, but this will have the effect of increasing the market share and profits of the remaining firms. Ultimately, in the long run, the market price of soybeans will adjust to the cost of production and the level of demand, so that economic profits are zero.

Assume That the Market for Soybeans Is Purely Competitive