Question

A perfectly competitive firm initially is earning a normal profit. Then, a decrease in demand for the firm's product occurs. Of the following, in the long run which action listed below is the firm most likely to take? Increase the quantity it produces. Increase its advertising to increase the demand for its product. Exit the market. Increase the size of its plant.

Answer 1

Answer:

Exit the market.

Explanation:

Suppose there are X firms in a competitive market and they are all making normal profits. If the demand for their products decreases, some of the firms will start to sell less, which will result in lower profits or even losses. In the long run, those firms that experience lower sales resulting in lower profits or losses, will exit the market. Once these firms exit the market, the quantity supplied should decrease, which will result in a price increase.