In the absence of barriers to entry, a typical firm is currently in long-run equilibrium. Assume there is an increase in the market demand for the good that the firm is producing. Which of the following will happen in the long run?

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BlackTom AI · Accepted Answer

The question describes a typical perfect competition scenario: no barriers to entry, the firm starts in long-run equilibrium, and there is an increase in market demand for the good. This setup implies certain long-run adjustments due to profit opportunities.
Option 1: 'The firm’s price will be greater than its average revenue.' In perfect competition, price equals average revenue (P = AR) because the firm is a price taker. After the demand increase is absorbed in the long run by entry and adjustment, the price does not stay above AR; it returns to the normal long-run level. Therefore this statement is incorrect.
Option 2: 'New firms will enter the market.' When demand rises, firms can earn positive economic profits in the short run, attracting new entrants. In the long run, entry continues until profits are driven back to zero and prices adjust to the normal level. Given there are no barriers, the result is indeed that new firms enter, expanding industry supply and restoring long-run equilibrium. This statement is correct.
Option 3: 'The firm will continue to produce the same quantity of output.' In the long run with entry, the total market supply increases, and the price tends to revert to its original long-run level. Per-firm output typically returns to the normal, efficient scale, but because more firms are in the market, total industry output changes. Saying the firm continues to produce the same quantity is not guaranteed and is not the standard long-run outcome under an emergency demand shift with entry. This makes the statement dubious and usually false.
Option 4: 'The firm will earn positive economic profit.' In the long run, competitive markets drive profits to zero since any positive profits induce entry. Thus, this statement is incorrect for the long-run outcome.
Option 5: 'The market supply will decrease, but the quantity supplied will increase.' Entry increases market supply, not decreases. The sentence contradicts the logic of entry in response to profits, so this statement is false.
Overall, the only statement that aligns with the long-run adjustment under increasing demand with free entry is that new firms will enter the market.

AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

In the absence of barriers to entry, a typical firm is currently in long-run equilibrium. Assume there is an increase in the market demand for the good that the firm is producing. Which of the following will happen in the long run?

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