Assume that firms in a perfectly competitive market are earning economic profits. Which of the following statements describes the change in market price and output as a result of the entry of new firms into this market?

A) The short - run market supply curve shifts to the right, causing price to fall and total market output to increase.

B) The short - run market supply curve shifts to the left, causing price to fall and total market output to increase.

C) The market demand curves shifts to the left, causing price to fall and market output to decrease.

D) The market demand curves shifts to the right, causing price to fall and market output to increase.

Question

Business

Darrell Washington

25 December, 06:12

Assume that firms in a perfectly competitive market are earning economic profits. Which of the following statements describes the change in market price and output as a result of the entry of new firms into this market?

A) The short - run market supply curve shifts to the right, causing price to fall and total market output to increase.

B) The short - run market supply curve shifts to the left, causing price to fall and total market output to increase.

C) The market demand curves shifts to the left, causing price to fall and market output to decrease.

D) The market demand curves shifts to the right, causing price to fall and market output to increase.

+4

Answers (1)

Know the Answer?

Hines · Answer 1

The correct answer is option A.

Explanation:

In a perfect competition, there is no restriction on entry or exit of firms. So, when firms earn positive economic profits, it attracts other firms to enter the market. When new firms join it leads to an increase in supply.

The short run supply curve shifts to the right, causing the price level to fall. The total output in the market will increase. It would lead to reduction n profit.

The process of new firms entering the market will continue till all the profits is exhausted.