Assume that the LCD and plasma television set industry is perfectly competitive.Suppose a producer develops a successful innovation that enables it to lower its cost of production.What happens in the short run and in the long run?
A) Initially, the firm will be able to increase its profit significantly, but in the long run its profits will still be greater than zero but lower than its short-run profits because other firms would also innovate.
B) The firm will probably incur losses temporarily because of the high cost of the innovation, but in the long run it will start earning positive profits.
C) This firm will be able to earn above normal profits indefinitely if it obtains a patent for its innovation.
D) The firm will be able to increase its profits temporarily, but in the long run its profits will be eliminated as other firms copy the innovation.

Question

Quizplus · Accepted Answer

In the short run, the firm will be able to increase its profits due to the successful innovation as it will be able to lower its cost of production. However, in the long run, other firms will also adopt the same innovation, leading to increased competition and lower prices. As a result, the profits of the firm will be eliminated in the long run. This is known as the principle of zero economic profit in perfectly competitive markets. Therefore, option D is the correct answer. Option A is incorrect as profits cannot be greater than zero in the long run in a perfectly competitive market. Option B is incorrect as it assumes that the firm will start earning positive profits in the long run, which may not necessarily be true. Option C is also incorrect as obtaining a patent for an innovation does not guarantee indefinite above-normal profits, as firms can still find ways to develop alternative innovations or substitutes for the product.

Assume That the LCD and Plasma Television Set Industry Is