CA Foundation · Business Economics · Price Determination in Different Markets
In the long-run equilibrium of a perfectly competitive firm in a constant-cost industry, which of the following conditions holds?
The correct answer is that price equals minimum average cost and the firm earns only normal profit. Free entry and exit in perfect competition remove supernormal profits and losses in the long run, so price settles at the lowest point of long-run average cost.
- APrice equals minimum average cost and the firm earns only normal profitCorrect
- BPrice is greater than marginal cost and the firm earns supernormal profit
- CPrice equals average revenue but is below minimum average cost
- DMarginal revenue exceeds marginal cost at the equilibrium output
Explanation
In the long run, free entry and exit eliminate supernormal profit or losses. The firm therefore operates where P = MR = MC = minimum LAC, earning only normal profit. Option B describes a short-run position that attracts new entrants.
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