Questions: Suppose industry X is a perfectly competitive and in long-run equilibrium, with firms earning zero economic profit. If an improvement in production technology causes the average total cost of all firms to fall: new firms will enter the industry, the industry supply will rise, and a new equilibrium will be established at a lower price. some firms will exit the industry, the industry supply will fall, and a new equilibrium will be established at a lower price. some firms will exit the industry, the industry supply will fall, and a new equilibrium will be established at a higher price. new firms will enter the industry, the industry supply will rise, and a new equilibrium will be established at a higher price.

The answer is the first one: new firms will enter the industry, the industry supply will rise, and a new equilibrium will be established at a lower price.

Explanation:

1. New firms will enter the industry, the industry supply will rise, and a new equilibrium will be established at a lower price.

   • In a perfectly competitive market, if an improvement in production technology reduces the average total cost, existing firms will experience lower costs and potentially higher profits in the short run. This attracts new firms to enter the industry, increasing the overall supply. As supply increases, the market price will decrease until firms are again earning zero economic profit in the long run.

2. Some firms will exit the industry, the industry supply will fall, and a new equilibrium will be established at a lower price.

   • This option is incorrect because a reduction in average total cost due to improved technology would not cause firms to exit. Instead, it would make the industry more attractive, leading to entry rather than exit.

3. Some firms will exit the industry, the industry supply will fall, and a new equilibrium will be established at a higher price.

   • This option is incorrect for similar reasons as the previous one. Improved technology reduces costs, which would not lead to firms exiting or a higher price.

4. New firms will enter the industry, the industry supply will rise, and a new equilibrium will be established at a higher price.

   • This option is incorrect because while new firms entering the industry will increase supply, the increased supply will lead to a lower, not higher, equilibrium price.

In summary, the correct outcome of improved production technology in a perfectly competitive industry is an increase in supply and a decrease in the equilibrium price.