In the long-run, how much economic profit do firms in perfectly competitive markets make?

Question

BlackTom AI · Accepted Answer

In perfect competition, firms are price takers and free entry and exit drive long-run outcomes. The key concepts are: price-taking behavior, free entry and exit, average total cost (ATC), and the distinction between economic profit (includes implicit costs) and accounting profit.

Step-by-step reasoning:
1. Revenue and cost expressions: Total revenue (TR) = P × Q. Total cost (TC) = ATC × Q.
2. Economic profit = TR − TC = (P × Q) − (ATC × Q) = (P − ATC) × Q.
3. If firms in the short run earn positive economic profit (P > ATC), new firms enter because of free entry. Entry increases market supply, which lowers the market price P.
4. If firms in the short run incur losses (P < ATC), some firms exit. Exit reduces supply, raising the market price P.
5. Entry or exit continues until price adjusts so that P = ATC at the profit-maximizing output. Plugging P = ATC into the profit expression gives economic profit = (P − ATC) × Q = 0 × Q = 0.

Why the correct answer is correct:
- In the long run, free entry and exit cause price to equal minimum ATC, eliminating any economic profit. Firms earn a normal return that exactly compensates for both explicit and implicit costs, so economic profit is zero.

Why the other choices are incorrect:
- a. They make a loss: Not generally true in the long run; losses trigger exit until losses disappear.
- c. It depends on what product they are selling: Product type does not change the long-run result under perfect competition assumptions.
- d. A maximum of $100,000: Arbitrary numeric cap has no basis in the model.

Conclusion: Therefore the long-run economic profit for firms in perfectly competitive markets is zero (answer b. Zero).

In the long-run, how much economic profit do firms in perfectly competitive markets make?单项选择题

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