The theory of perfectly competitive markets leads to the prediction that the fir

Question

The theory of perfectly competitive markets leads to the prediction that the firms in a perfectly competitive industry will:

a earn zero economic profit in long-run equilibrium, although economic profit may be positive, zero, or negative in short-run equilibrium.

b all be exactly the same size in long-run equilibrium.

c earn zero economic profit in both short-run and long-run equilibrium.

d earn zero economic profit in short-run equilibrium, although economic profit may be positive, zero, or negative in long-run equilibrium.

Explanation / Answer

The correct answer for this question is first option option A.

This is so because the long run for a perfectly competitive firm bring minimum of average total cost as the minimum efficient scale of production. When price is equal to minimum average cost in the long run there is no economic profit however there can be profit in the short run when the price is determined by the market forces of demand and supply.

Whenprice is greater than the short run average total cost there are profits and when the price is less than the short analytical cost there are losses.

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