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Chapter 8: Problem 26

Do entry and exit occur in the short run, the long run, both, or neither?

Short Answer

Expert verified
Entry and exit of businesses in a market do not occur in the short run, as factors of production are fixed and there is not enough time for adjustments. In contrast, in the long run, with variable factors of production and ample time for adjustments, entry and exit do occur.

Step by step solution

01

Short Run

In the short run, factors of production (e.g. labor, capital) are fixed, and there is not enough time for new firms to enter the market or for existing firms to exit. This is primarily due to the presence of fixed costs, such as contracts and physical capital, that cannot be adjusted immediately. As a result, entry and exit do not occur in the short run.
02

Long Run

In the long run, factors of production are variable and can be adjusted. Firms can enter or exit the market in response to economic signals, such as changes in demand or the overall market conditions. This is because there are no fixed costs in the long run, and firms have enough time to adjust their production levels and make decisions about entering or leaving the market. Therefore, entry and exit do occur in the long run.
03

Conclusion

Entry and exit of businesses in a market do not occur in the short run, as factors of production are fixed and there is not enough time for adjustments. In contrast, in the long run, with variable factors of production and ample time for adjustments, entry and exit do occur.

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Most popular questions from this chapter

The AAA Aquarium Co. sells aquariums for \(\$ 20\) each. Fixed costs of production are \(\$ 20 .\) The total variable costs are \(\$ 20\) for one aquarium, \(\$ 25\) for two units, \(\$ 35\) for the three units, \(\$ 50\) for four units, and \$80 for five units. In the form of a table, calculate total revenue, marginal revenue, total cost, and marginal cost for each output level (one to five units). What is the profit-maximizing quantity of output? On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves.

Suppose that the market price increases to \(\$ 6,\) as Table 8.14 shows. What would happen to the profit-maximizing output level?

Perfectly competitive firm Doggies Paradise Inc. sells winter coats for dogs. Dog coats sell for \(\$ 72\) each. The fixed costs of production are \(\$ 100 .\) The total variable costs are \(\$ 64\) for one unit, \(\$ 84\) for two units, \(\$ 114\) for three units, \(\$ 184\) for four units, and \(\$ 270\) for five units. In the form of a table, calculate total revenue, marginal revenue, total cost and marginal cost for each output level (one to five units). On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves. What is the profit maximizing quantity?

A firm's marginal cost curve above the average variable cost curve is equal to the firm's individual supply curve. This means that every time a firm receives a price from the market it will be willing to supply the amount of output where the price equals marginal cost. What happens to the firm's individual supply curve if marginal costs increase?

Why will profits for firms in a perfectly competitive industry tend to vanish in the long run?
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