Question

In a long-run equilibrium in a perfect competitive market, which of the following is true? (Suppose all firms have identical cost curves)

A Economic profit may be negative

B P=ATC

C P=AVC

D Accounting profit may be negative

Answer 1

Perfectly competitive market is a type of market in which there are large number of buyers and sellers selling homogeneous good with no barrier on entry or exit from the market. Due to no barrier condition:

• If firms in the market earning economic profit in the short run then more firms will starts to enter into the market which cause price and profit of all the firms to decrease until the economic profit for each firm become 0 in the long run.
• If firms in the market earning economic loss in the short run then more firms will starts to exit the market which cause price and profit of all the existing firms to increase until the economic profit for each firm become 0 in the long run.

So above discussion implies that Economic profit for each firm is 0 in the long run.

Economic Profit= (P-ATC) x Q= 0

(P-ATC)= 0

P= ATC

Option B is the correct answer.