Economic profits in the rent-a-wreck industry are $400,000 per firm.Assuming that the industry is perfectly competitive,

A) new firms will enter and the supply of the car rentals will increase.
B) new firms will enter but there will be no effect on the supply of car rentals.
C) firms will leave the industry and supply will fall.
D) the industry is in equilibrium.

Economic profits indicate that firms in the rent-a-wreck industry are earning above-normal profits. This will attract new firms to enter the industry to take advantage of the profits. As new firms enter, the supply of car rentals in the market will increase, shifting the supply curve to the right. This will lead to a decrease in the market price of car rentals, causing economic profits to decrease. Eventually, the industry will reach a new long-run equilibrium, where firms earn only normal profits.