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If firms in a perfectly competitive industry are earning supernormal profits in the short run, what happens in the long run?
AExisting firms exit and price rises further
BNew firms enter, price falls, and profits reduce to normal
CSupernormal profits persist because entry is blocked
DPrice stays fixed while output falls to zero
Answer & Solution
Correct answer: B. New firms enter, price falls, and profits reduce to normal
1. There are no barriers to entry under perfect competition.
2. Supernormal profit attracts new firms into the industry.
3. Greater supply shifts the market supply curve right and lowers the price.
4. Entry continues until price equals ATC and only normal profit remains.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 4 Unit III "Price-Output Determination under Different Market Forms", p.8_
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