12 The market for toothpicks is characterized by pure competition and is currently in long-run equilibrium. Demand for toothpicks increases.
We would expect ______ in the short run and ______ in the long run.
A. negative economic profits; firms to exit
B. positive economic profits; firms to enter
C. zero economic profits; firms to enter
D. zero economic profits; firms to exit

Question

12    The market for toothpicks is characterized by pure competition and is currently in long-run equilibrium. Demand for toothpicks increases. 
We would expect ______ in the short run and ______ in the long run.
A.    negative economic profits; firms to exit
B.    positive economic profits; firms to enter
C.    zero economic profits; firms to enter
D.    zero economic profits; firms to exit

BlackTom AI · Accepted Answer

We begin by restating the scenario and the possible choices to ensure clarity about what is being evaluated.
The situation: In a pure competition market for toothpicks, the market is in long-run equilibrium. Demand increases. We are asked to predict what happens in the short run and in the long run.
Option A: 'negative economic profits; firms to exit.' In the short run, an upward shift in demand raises the market price, so existing firms typically earn positive profits, not negative profits. Exiting would occur if profits were negative, which is unlikely immediately after a demand increase. So this combination is inconsistent with the typical short-run response to a demand increase in perfect competition.
Option B: 'positive economic profits; firms to enter.' The usual sequence is: demand increases → higher price and higher profits in the short run for existing firms, because fixed factors and current capacity limit immediate adjustment. In the long run, the attractive profits entice new firms to enter, shifting supply to reduce prices back toward the normal level and restoring zero economic profit in equilibrium. This option captures the standard short-run profit signal and the long-run entry response.
Option C: 'zero economic profits; firms to enter.' Zero profits in the short run would imply that the price equals average total cost even after the demand increase, which is not typically the case immediately when demand rises. Some firms may still earn positive profits in the short run, encouraging entry in the long run, but zero profits right away isn’t the usual short-run outcome of a demand shock in a perfectly competitive market.
Option D: 'zero economic profits; firms to exit.' Exiting occurs when profits are negative. A demand increase tends to raise prices and profits in the short run, so negative profits are not the immediate outcome. The long-run adjustment would tend toward zero profits, but the long-run action following a demand increase is entry, not exit.
Examining the logic of each option helps distinguish the typical outcomes in perfect competition: the short run often yields positive profits due to higher price, while the long run features entry that restores zero economic profits. The alternative sequences either misstate the short-run profitability due to the demand shift or misidentify the direction of firm entry/exit in the long run.
In summary, the reasoning aligns with the standard model: a demand increase in a purely competitive market produces positive profits in the short run and entry in the long run, driving profits back to zero. This conceptual flow helps explain why the other options are inconsistent with the observed dynamic after a demand shift in perfect competition.

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