53. Which of the following is true concerning purely competitive industries?

A. There will be economic losses in the long run because of cut-throat competition.
B. Economic profits will persist in the long run if consumer demand is strong and stable.
C. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.
D. There are economic profits in the long run but not in the short run.

Question

53.   Which of the following is true concerning purely competitive industries?

A. There will be economic losses in the long run because of cut-throat competition.
B. Economic profits will persist in the long run if consumer demand is strong and stable.
C.  In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.
D. There are economic profits in the long run but not in the short run.

BlackTom AI · Accepted Answer

Let’s dissect each statement about purely competitive industries and compare them to standard economic theory.
Option A: 'There will be economic losses in the long run because of cut-throat competition.' In perfect competition, firms earn zero economic profit in the long run due to freedom of entry and exit; however, long-run losses do not persist because new firms enter or existing firms exit until profits are driven to zero. Therefore, this claim is incorrect.
Option B: 'Economic profits will persist in the long run if consumer demand is strong and stable.' Even with strong and stable demand, free entry and exit in a purely competitive market erode above-normal profits; in the long run, profits are driven down to zero economic profit (normal profit). Hence this statement is false.
Option C: 'In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.' This aligns with the standard analysis: in the short run, existing firms may earn positive, negative, or normal profits due to fixed factors and variable output; but in the long run, entry and exit force profits to normal, i.e., zero economic profit. This statement is consistent with long-run equilibrium in perfect competition.
Option D: 'There are economic profits in the long run but not in the short run.' This is the opposite of the established pattern: long-run profits are not sustained in perfect competition, and short-run profits can occur. This makes the option incorrect.
Overall, the statements are evaluated against the core idea that short-run outcomes can vary, while long-run outcomes in a purely competitive market yield normal profits due to free entry and exit, so the remaining choice captures that behavior.

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