Question

1. Explain and draw a graph the role of entry and exit in determining the long-run position of a perfect competitive firm.

Answer 1

A long-run position of a perfect competitive firm is the position where firms earns zero economic profits or zero losses and zero profits. In a competitive market, firms produce the output where marginal revenue equals to the marginal cost and price equal to the marginal revenue since the firms are price taker. when the firms are earning profits in short run, many firms attract the industry and enter into industry which increase the supply of products in market and hence equilburim price decrease so the profits also reduces , this process of new firms enter the industry will continue till all the profits exhausted and firms will earn zero economic profits in the market and vice- versa.