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Our model predicts that firms in a perfectly competitive market will earn zero economic profit in...


Our model predicts that firms in a perfectly competitive market will earn zero economic profit in the long run, yet continue to produce the socially optimal quantity. Why would a firm continue to produce a product that it earns no profit on?
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Question : Our model predicts that firms in a perfectly competitive market will earn zero economic profit in the long run, yet continue to produce the socially optimal quantity. Why would a firm continue to produce a product that it earns no profit on?

Solution : In the long run , the firms in a perfectly competitive market will earn zero economic profit. But they will earn normal profit which will help them recover variable cost. Normal profit is the main reason that a firm continue to produce a product that it earns no profit on. A firm can keep going on till the MC = MR, once MR falls below the MC, Tthe firm will stop producing.

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