5. If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then:
A. the selling price for this firm is above the market equilibrium price.
B. new firms will enter this market.
C. some existing firms in this market will leave.
D. there must be price fixing by the industry's firms.

Question

5.    If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then:
A.    the selling price for this firm is above the market equilibrium price.
B.    new firms will enter this market.
C.    some existing firms in this market will leave.
D.    there must be price fixing by the industry's firms.

BlackTom AI · Accepted Answer

First, we restate the scenario and options to ensure clarity: a purely competitive firm is producing where MR = MC and earning an economic profit. The options are A) price above market equilibrium price, B) new firms will enter this market, C) some existing firms will leave, D) there must be price fixing by the industry's firms.
Option A: 'the selling price for this firm is above the market equilibrium price.' In perfect competition, the market price is determined by supply and demand, and individual firms are price takers. If a firm is earning an economic profit, that implies the price is above the firm's average total cost (ATC) at the MR=MC output in the short run. However, the long-run effect in a purely competitive market is that positive economic profits attract new entrants, which increases market supply and drives the price down toward the minimum point of the average total cost curve. Therefore, stating that the selling price is above the market equilibrium price is misleading; the price will adjust downward toward the long-run equilibrium where economic profit is zero. This makes Option A incorrect.
Option B: 'new firms will enter this market.' With positive economic profits in a perfectly competitive market, entry is incentivized. As new firms enter, market supply increases, putting downward pressure on price until profits are exhausted (economic profit goes to zero in the long run). This aligns with standard monopoly-free, perfectly competitive dynamics. Option B is consistent with the theory and is thus correct.
Option C: 'some existing firms in this market will leave.' This would occur if firms were earning losses, not profits. When MR = MC yields positive profit, incumbent firms have no incentive to exit; instead, there is an incentive for new firms to enter. Hence C is incorrect.
Option D: 'there must be price fixing by the industry's firms.' Price fixing implies collusion and is antithetical to perfect competition, where firms are price takers and prices are determined by market forces, not by industry-wide coordination. In a purely competitive market, price fixing does not occur as a logical outcome of MR = MC with profits. Therefore, D is incorrect.
In summary, the positive economic profit in a perfectly competitive market triggers entry, not exit or price manipulation, which makes Option B the accurate choice among the given statements.

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