Question

Suppose that the price of corn, a crop produced in a perfectly (or purely) competitive industry, increased 208% last year as demand for corn based ethanol fuel increased. What do you expect to happen in the long run for the corn industry given this recent success? The price per bushel of corn will continue to increase, yielding higher profits. Thus more firms will enter the market indefinitely. Profits will become negative due to over farming, which will result in the corn farming industry going under. Profits will be equal to zero. None of the above. Suppose the firms in the market for bacon, also a perfectly (or purely) competitive industry, experienced losses last quarter due to people becoming increasingly concerned about their houses smelling like fat and grease all the time. What do you expect to happen in the long run for the bacon industry? Seeing this as an opportunity to monopolize a fledging industry, firms will enter the industry, shifting supply to the right. Profits will remain negative, which will result in the closing down of the industry as a whole. Profits will be equal to zero. None of the above.

Answer 1

(1) In long run, Profits will equal Zero.

In short run, higher price will increase excess profits which will attract new entry. New firms will continue to enter until market supply increase, lowering the market price, causing all economic profits to be zero.

(2) In long run, Profits will equal Zero.

In short run, losses will cause some firms to exit the market. As firms exit, market supply starts falling and market price start rising, until all losses are eliminated and all economic profits are zero.