Pumpkin growing is a perfectly competitive industry. Suppose that pumpkin growers are all incurring an economic loss. What happens as time passes? What is the long-run equilibrium outcome?
What will be an ideal response?
Because the firms are incurring an economic loss, as time passes some firms will exit the market, perhaps by switching to other crops, or perhaps by closing entirely. As farmers leave the market, the supply of pumpkins decreases. The supply curve shifts leftward and the price of a pumpkin rises. As the price rises, the economic losses of the remaining firms decrease. Eventually enough farmers leave the market so that the price rises sufficiently so that the remaining firms make zero economic profit and no longer incur an economic loss. At that point, the long-run equilibrium is reached because there is no further incentive for any firms to leave the market.
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Indicate whether the statement is true or false