Consider if market demand is downward sloping ang that all firms in a competitiv

Question

Consider if market demand is downward sloping ang that all firms in a competitive market are initially in long run and the short run equilibrium. All firms have U shaped margianl and average cost curves. Assume that the fixed costs of each firm decreases. In the long run we would expect the firms output to ________ and profits to ________.

A. increase; decrease

B. increase; increase

C. decrease; decrease

D. decrease; increase

E. none of the above.

The answer is E. Can someone explian this to me, please? Thank you.

Explanation / Answer

In perfect competition long run equilibrium, all firms just earn normal profit. In long run if average cost is decreasing then finally prices will also decrease and make only normal profit for all firm. Because if firms earn economic profit then other firms will enter the market and decrease the price making profit normal.

Thus answet is E

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