In long-run equilibrium, all firms in the industry ean zero economic profit. Why
ID: 1217014 • Letter: I
Question
In long-run equilibrium, all firms in the industry ean zero economic profit. Why is this true? All firms in perfectly competitive industries earn zero economic profit in the long run because OA. firms are price takers, maximizing profit by producing where price equals marginal cost. OB. barriers to entry and exit prevent firms from earning positive or negative economic profit. Oc. a positive profit would induce firms to enter, decreasing price and profit, and a negative profit would induce firms OD. a positive profit would induce firms to produce more, increasing price and profit, and a negative profit would OE. firms are price takers, maximizing profit by producing where price equals average cost. to exit, increasing price and profit. induce firms to produce less, decreasing price and profit.Explanation / Answer
Q.1.While a firm can lose money in the short run, no firm can keep doing it forever. In the long run, a perfectly competitive industry will be in equilibrium where price equals average total cost. At this point, firms will earn what economists call alternatively either normal profits or zero economic profits.
The theory of perfect competition explicitly assumes that there are no entry or exit barriers to new participants in an industry. With free entry, positive economic profits induce new entrants. As these firms enter, the supply curve shifts to the right, causing a fall in the equilibrium price of the product. Entry will stop, and equilibrium will be achieved, when economic profits have fallen to zero.
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