Assume that firms in a perfectly competitive market are earning economic profits

Question

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? The short - run market supply curve shifts to the right, causing price to fall and total market output to increase. The short - run market supply curve shifts to the left, causing price to rise and total market output to decrease. The market demand curve shifts to the left, causing price to fall and market output to decrease. The market demand curve shifts to the right, causing price to rise and market output to increase.

Explanation / Answer

As, new firms enters the market, the supply in the market increases due to increase in the number of firms, as a result short run supply curve will shift to the right, Which leads to a fall in price and a rise in quantity of output.

So, the change in market price and output as a result of the entry of new firms into this market results to

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

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