Assume a competitive industry is in long-run equilibrium and firms in the industry are earning zero economic profit. Now assume that production technology improves such that average total costs decline by $5 per unit. How will the industry move to a new long-run equilibrium?
a)The decline in costs will result in economic profits in the short run. In the long run, firms will enter the market causing the price to fall until all firms only earn normal profits.
b)In the short run, market entry will occur and the market price will fall. However, there will be so much entry into the market that firms will have losses in the long run.
c)It will not move to a new long-run equilibrium. New firms will enter the market, which will increase the price for that good and the long-run equilibrium will remain the same.
d)The new long-run equilibrium will be where each firm has a normal profit plus $5.