Consider a competitive, free entry market. The market is initially in equilibrium, at the point wheresupply intersects demand. Full credit on this question requires a graphical analysis. (You can embedthat analysis within the Word document or provide it on a separate page(s), as a pdf file or in anystandard image format.)
(a) Suppose that the incumbent firms are initially earning positive economic profits. After theprocesses of entry or exit are complete, what will determine the long run equilibrium price andquantity in this market? Will the entry or exit process increase or decrease equilibrium price andquantity, relative to the initial situation? You can assume, for all parts of the question, that there are no exogenous shifts in the demand for thegood.
(b) Continuing part (a), what will happen to the price and quantity of an individual incumbentfirm, though the entry or exit process?
(c) Now suppose that the incumbent firms are initially reporting positive profits but earningnegative economic profits. Repeat part (a), starting from this different initial situation.
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