Many firms go out of business during recessions; however, recessions eventually end. Firms that survived the recession are most likely to earn positive economic profits in industries where which of the following is true?

Question

BlackTom AI · Accepted Answer

Economic profits persist when barriers to entry or capacity constraints prevent new firms from eroding those profits after demand recovers.

1) Relevant knowledge points and concepts
- Economic profit = total revenue − total opportunity costs (explicit + implicit). Positive economic profit attracts entry.
- In perfectly competitive markets with free entry and exit, long-run economic profit is driven to zero because new entrants increase supply, lowering price.
- Recessions cull less efficient firms; surviving firms may have short-run gains when demand returns, but whether profits persist depends on entry conditions and incumbent capacity.

2) Step-by-step reasoning
- After a recession, aggregate demand rises back toward pre-recession levels.
- If entry is free and potential competitors can enter quickly or incumbents can expand capacity rapidly, the increased supply from new entrants or expanded incumbents pushes market price down until economic profits are zero.
- If entry is slow or costly, or incumbents cannot quickly expand output (capacity constraints), supply remains limited relative to recovered demand, keeping prices above average total cost and allowing incumbents to earn positive economic profits.

3) Intermediate steps (conceptual)
- Demand increases → price tends to rise.
- Free/fast entry or rapid incumbent expansion → supply increases → price falls → profit → 0.
- Slow entry/incumbent expansion → supply remains constrained → price stays high → positive economic profit persists.

4) Why the correct answer is correct
Option D describes the situation where both existing firms cannot expand quickly and new competitors enter slowly. That limited responsiveness of supply means surviving firms capture sustained price increases and thus earn positive economic profits rather than having those profits competed away.

5) Why other options are incorrect (brief)
- If incumbents can expand quickly, they will increase supply and reduce price, eliminating profits.
- If entry is easy and competitors enter quickly, profits attract entry and are driven to zero.
- Any scenario with low barriers and fast adjustment prevents persistent economic profit.

6) Conclusion
Therefore, firms that survived a recession are most likely to earn positive economic profits in industries where existing firms cannot expand quickly and entry of new competitors is slow, confirming answer D.

Many firms go out of business during recessions; however, recessions eventually end. Firms that survived the recession are most likely to earn positive economic profits in industries where which of the following is true?单项选择题

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