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8 June, 12:22

A firm in a perfectly competitive industry in long-run equilibrium will earn normal returns and zero economic profit.

True or False?

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Answers (1)
  1. 8 June, 15:38
    0
    This statement is true.

    Explanation:

    In a perfectly competitive market, there are a large number of firms in the market. There is no barriers to entry to exit in the market. The firms are producing homogenous products.

    The firms in this market will earn positive profits in the short run as in short run, the firms can't enter the market.

    In the long run, though the firms will be attracted to the positive profits earned by the existing firms to enter the market.

    This will cause the supply in the market to increase, this increase in the supply will shift the supply curve to the left. This leftward shift in the supply curve will reduce the price of the product.

    The market share and profits of the individual firms will decline. This will continue till the profits are reduced to zero.
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