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IAI Actuarial Core Principles · Business Economics · Profit maximisation under perfect competition and monopoly

In the long run, which comparison of profits is correct for a perfectly competitive firm and a monopolist protected by high barriers to entry, assuming each has the same costs?

The competitive firm earns only normal profit in the long run because free entry erodes any supernormal profit, while a monopolist protected by barriers to entry can keep supernormal profit since rivals cannot enter the market.

  1. AThe competitive firm earns only normal profit, while the monopolist can sustain supernormal profitCorrect
  2. BBoth earn supernormal profit in the long run
  3. CBoth earn only normal profit in the long run
  4. DThe competitive firm sustains supernormal profit while the monopolist earns only normal profit
  5. Both necessarily make losses in the long run

Explanation

Free entry in perfect competition draws in new firms whenever supernormal profit exists, pushing price down to average cost. Barriers to entry stop this for the monopolist, so supernormal profit can persist.

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