1.

Explain the outcome of the following features of a perfectly competitive market (i) Freedom to the firm to enter the industry, (ii) Freedom to the firm to leave the industry.

Answer» <html><body><p></p>Solution : a)Implication of ' freedom of entry' : 'Freedom of entry' signifies that there are no barriers to the entry of new firms into industry. When the existing firms are earning abnormal profits, the new firms, attracted by the prospects of profit, enter the industry. This <a href="https://interviewquestions.tuteehub.com/tag/raises-1176804" style="font-weight:bold;" target="_blank" title="Click to know more about RAISES">RAISES</a> <a href="https://interviewquestions.tuteehub.com/tag/market-25464" style="font-weight:bold;" target="_blank" title="Click to know more about MARKET">MARKET</a> supply, which in turn, leads to fall in market price and <a href="https://interviewquestions.tuteehub.com/tag/consequently-929800" style="font-weight:bold;" target="_blank" title="Click to know more about CONSEQUENTLY">CONSEQUENTLY</a> profits. Te entry continues till each <a href="https://interviewquestions.tuteehub.com/tag/firm-989667" style="font-weight:bold;" target="_blank" title="Click to know more about FIRM">FIRM</a> is earning just the normal profits. b) 'Freedom to exit' signifies that there are no barriers which restrict the existing firms from leaving the industry. The firms try to leave when they are facing losses. As the firms start leaving, market supply falls, leading to rise in market price and consequently reduction in losses. The firms continue to leave till the losses are <a href="https://interviewquestions.tuteehub.com/tag/wiped-7723135" style="font-weight:bold;" target="_blank" title="Click to know more about WIPED">WIPED</a> out and each existing firm is earning just the normal profits.</body></html>


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