Question

The following statements describe why profits for firms in a perfectly competitive industry tend to vanish in the long run. Select the explanation that most accurately reflects this scenario?

A) Firms try to increase supply to cover their costs if they experience losses, and this leads to zero profits.

B) Firms are unable to generate revenue over time because the demand for products drops.

C) When other perfectly competitive firms see an opportunity to earn profits and enter the market prices drop.

D) When other perfectly competitive firms see an opportunity to earn profits and enter the market, prices rise.

Answer 1

C) When other perfectly competitive firms see an opportunity to earn profits and enter the market prices drop.

Explanation :

When there is positive economic profit, new firm have incentive to enter the market. When new firms enter the market, supply curve shifts to the right and that cause price to decrease and the demand curve for individual firm falls. So, due to entrance of new firms, price drops and profit for all the firm decreases. And it becomes zero in long run.