Question

If Dirk’s Doughnuts is a perfectly competitive firm and is currently incurring economic losses of $500: a. firms will enter the market. b. individuals will demand fewer doughnuts. c. the market supply curve will shift to the right. d. individuals will demand more doughnuts. e. firms will exit the market.

Answer 1

Answer:

The correct answer is option e.

Explanation:

In a perfectly competitive market, there are no limitations on the entry and exit of firms. If the existing firms have positive economic profits, this attracts other potential firms to join the market. In case of losses the firms incurring losses exit the market.  

If Dirk’s Doughnuts is operating in a perfectly competitive market and is incurring economic losses, firms having losses will exit the market.  

This will cause the market supply to decrease. As the supply curve shifts to the left, the price of the product will increase. This will cause profits to increase. The firms will operate at zero economic profits.