Suppose that the market for haircuts in a community is a perfectly competitive constant-cost industry and that the market is initially in long-run equilibrium.Subsequently,an increase in population increases the demand for haircuts.In the long run,firms will ___ the market,driving the price of haircuts _ and the profits of individual firms ___.

A) enter;up;back to zero
B) enter;down;back to zero
C) leave;up;up
D) leave;up;back to zero

Question

Suppose that the market for haircuts in a community is a perfectly competitive constant-cost industry and that the market is initially in long-run equilibrium.Subsequently,an increase in population increases the demand for haircuts.In the long run,firms will _____ the market,driving the price of haircuts _____ and the profits of individual firms _____.

A) enter;up;back to zero
B) enter;down;back to zero
C) leave;up;up
D) leave;up;back to zero

Fizzah Kashif · Accepted Answer

Final Answer : B, Explanation :  With an increase in population, the demand for haircuts will increase. This will lead to firms entering the market, increasing the supply of haircuts. The increase in supply will cause the price of haircuts to decrease in order to maintain equilibrium. As the price decreases, the profits of individual firms will also decrease, driving some firms out of the market in the long run. Therefore, the correct answer is option B, where firms will enter the market, driving the price of haircuts down, and the profits of individual firms back to zero in the long run.

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