Question

Consider perfect competition, briefly explain whether it is possible for firms in a perfectly competitive market to earn zero economic profit even if they have incurred a sunk cost upon entry into the market. Given an example of such a cost.

Answer 1

Perfect competition is a market situation in which there are a large number of buyers and sellers and the entry into, as well as exit from the market, is free. It is possible for a firm to earn zero economic profit in the long run. The reason for this is the size of the market and also the free entry and exit. When firms earn the supernormal profit in the short run then more firms from outside are attracted to this market and when they enter the market then the profit gets distributed and they only earn normal profit.

Is also takes place when firms have incurred a sunk cost, the cost which can't be recovered, in things like buying machinery.