In any industry with free entry, increase profits mean new firms will enter the industry over the long run. From the point of view of existing firms this is equivalent to a decrese in demand. The graph to the left shows the demand curve for a typical firm shifting back due to entry and price and quantity falling again and profits returning to zero.

  

9.Again, consider the lowering of the drinking age as stated in the prior problem. Our best long run prediction for such an industry is that:

1. due to the reduction in profitability, bars will start to close reducing demand for the remaining bars. An increse in demand will always lead to an increase in profits which in turn will always lead to entry in an industry where entry is free. If, for some reason bars did close however this would lead to increased demand for remaining bars.
2. due to the increase in profitability more bars will be opened reducing demand for remaining bars.
3. due to the reduction in profitability, bars will start to close increasing demand for the remaining bars. An increse in demand will always lead to an increase in profits which in turn will always lead to entry in an industry where entry is free.
4. due to the increase in profitability more bars will be opened increasing demand for remaining bars. While it is true that more bars will open, entry reduces demand for existing firm rather than increasing it.
5. there will be no change in the number of bars in the long run. This would only occur if there were strong barriers to entry.

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