When discussing pure competition, the term long run refers to a period of time long enough to allow:
When discussing pure competition, the term long run refers to a period of time long enough to allow: LO11.1 a. firms already in an industry to either expand or contract their capacities. b. new firms to enter or existing firms to leave. c. both a and b. d. neither of the above
Here is the full solution including the answer and explanation.
c is correct
In the case of pure competition, the industry can expand or shrink its business only in the long run. The long run only provides free entry and exit of the firms, because, in the short run, the firms do not get much time to liquidate their assets. But, in long run, the firms get much time to liquidate their assets and so they can leave or enter the market.
a is incorrect
In case of pure competition in the long run, the firms can freely enter or exit. As the number of firms is not fixed, the industry can increase or shrink the business. New firms enter the market attracted by the supernormal profit, which will expand the industry. Similarly, existing firms exit from the industry for the loss, which shrinks the industry. This is a long-run phenomenon.
b is incorrect
In long run, the industry earns a normal profit. If it earns supernormal profit, then new firms will enter the market attracted by this profit. The supply of the market will increase, which will decrease the price to equilibrium. Again, if the industry earns a loss some existing firms will leave the market. The supply of the market will decrease, which will increase the price to reach equilibrium. This is a long-run phenomenon.
d is incorrect
The long run allows the industry to expand or shrink the business. The firms can freely enter and exist in the long run only.
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