Question

Which of the following explains why profits are zero in the long-run for perfectly competitive firms?

                        a) since firms allowed to enter and exit the market, firms earning negative profits will leave the market,                         while new firms enter the market to take up the positive profits

                        b) since firms all produce the same good, they must have the same cost so they all earn zero profits

                        c) firms cannot raise price so it is not possible for them to make a profit

                        d) since all inputs are variable in the long run, firms are able to use the correct amounts of capital and                            labor to earn zero profits

Answer 1

a) since firms allowed to enter and exit the market, firms earning negative profits will leave the market,                         while new firms enter the market to take up the positive profits

The perfectly competitive market have free entry and exit if there is profit new firm will enter up to the economic profit is zero and if the market is in losses some of the firm leave the market up to the economic profit is zero.