Question

In a long-run equilibrium in a perfectly competitive market, firms are selling at a price equal to average cost. True or false

Answer 1

Ans. True

In long-run equilibrium in the perfectly competitive market, firms are selling at a price equal to average cost because if the firms are earning profits in the short run, more firms will enter in the market and supply will increase that will lead to falling in the price until equal to the minimum average cost where each firm will earn a normal profit ( zero economic profit).

Similarly, if the firms are incurring a loss in the short run, firms will exit the market in the long run and supply will decrease and the price will increase until it will be equal to the minimum average cost where each firm will earn a normal profit ( zero economic profit).