Do entry and exit occur in the short run, the long run, both, or neither?

• A. Only in the short run
• B. Neither
• C. Both
• D. Only in the long run

Answer: (C)

Entry and exit mean changes in the number of firms in an industry. In the short run, some inputs are fixed, so firms can’t perfectly adjust capacity, but that doesn’t stop entrants from starting up or existing firms from leaving if they can mobilize resources quickly or if the profitability outlook changes. A new firm might enter by leasing equipment or using available space, while a firm facing losses can shut down and exit. In the long run, all inputs are variable, so entry and exit occur more freely as firms respond to profits or losses and market conditions converge toward zero economic profit in a competitive market. So, entry and exit can happen in both the short run and the long run, with the short-run dynamics being more constrained but still possible.