Answer to Question #131579 in Microeconomics for sahar

Question

I. Which assumptions of perfect competition imply that individual firms in perfect competition are price takers and how?
II. Why is average revenue (AR) equal to marginal revenue (MR) for a competitive firm?
III. Why does a competitive firm make normal profits in long run?

Answer 1

The assumption that that goods are identical is necessary if firms are to be price takers in the fact that they have to sell goods at equilibrium price.

This is because the price remains constant over varying levels of output.

In the long time, firms that make abnormal profit will attract new ones which will enter freely due to the two assumptions already stated. Some firms will exit until the remaining ones make normal profit again. So eventually, all firms in perfect competition will earn normal profit "or rather zero economic profit"