Answer to Question #61027 in Microeconomics for jerrod

Question

In the long run​ equilibrium, a typical perfectly competitive firm earns
A.
zero economic profit.
B.
a positive economic profit.
C.
negative economic​ profit, that​ is, an economic loss.
D.
zero accounting profit.

Answer 1

Explanation: under perfect competition in the short run firms can make economic (super-normal) profits (or losses). However, in the long run firms are attracted into the industry if the incumbent firms are making economic profits. This happens because there are no barriers to entry and because there is perfect knowledge. The effect of this entry into the industry is to shift the industry supply curve to the right, which drives down price until the point where all economic profits are exhausted. If firms are making losses, they will leave the market as there are no exit barriers, and this will shift the industry supply to the left, which raises price and enables those left in the market to derive normal profits.