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CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market

In the long-run equilibrium of a perfectly competitive industry with free entry and exit, what is true of each firm?

Each firm earns only normal profit, with price equal to the minimum point of average cost. Free entry and exit eliminate supernormal profits and losses over time, so in long-run equilibrium price equals marginal cost and average cost.

  1. AIt earns supernormal profit equal to the entry cost
  2. BIt earns only normal profit, with price equal to minimum average costCorrect
  3. CIt earns a loss which is covered by subsidy
  4. DIt charges a price above marginal cost to cover fixed costs

Explanation

Supernormal profits attract new entrants, increasing supply and lowering price; losses cause exit and raise price. This process stops when price equals minimum average cost, leaving only normal profit, with P = MC = AC.

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