In any industry with free entry equilibrium long run profits must be zero, otherwise entry will continue when profits are positive and exit will occur when profits are negative. In this case since demand increased leading to short run profits, in the new long run equilibrim there will be more firms since profits lead to entry.
10. Once more considering the effect of a reduction in the drinking
age on the bar business. Comparing a new long run equilibrium
with the old we expect:
- More bars, but profits are back to zero.
- Fewer bars but profits are back to zero. This would be the outcome if demand had fallen.
- The same number of bars but profits are higher. This is the short run outcome, but in the long run new bars will open.
- Fewer bars but profits are higher. This could only occur if a strong barrier to entry, so strong that it forced existing bars to close, were somehow to arise.
- More bars, but with positive profits. This could be true temporarily along the way to the long run equilibrium, but positive profits are a disequilibrium outcome in an industry with free entry.
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