Chapter 60, Problem 5MCQ

To determine

Perfectly competitive industry response when a firm earns a positive economic profit.

Answer to Problem 5MCQ

(b) The short-run industry supply curve will shift right.

Explanation of Solution

When a firm earns a positive profit in a perfectly competitive market then the short-run industry supply curve will shift right because a positive profit will attract a new firm which leads to a new entrant of firms. As a result, several firm increases lead to an increase in industry supply that shifts the short-run industry curve to the right. Hence, option (b) is correct, and (a) and (c) are incorrect.

As new firms enter due to a positive profit, the supply curve shifts rightward which reduces the equilibrium market price and quantity of each firm. Hence, options (d) and (e) are incorrect.

Economics Concept Introduction

Introduction:

In a perfectly competitive industry, there is a large number of buyers and sellers, and a firm can sell as much as output at a market-determined price. In the short run, the firm may earn a positive profit and a negative profit. If the firm earns a positive profit, then the new firm will enter and when the firm suffers a loss then the existing firm will leave the market.