In the long-run,firms in a competitive industry earn only a normal rate of return because:
A)decreasing returns to scale causes per unit costs to rise.
B)input prices will rise in the long-run and eliminate abnormal profits.
C)entry of new firms will eliminate abnormal profits.
D)profit per unit declines in the long-run.

Question

Quizplus · Accepted Answer

In a competitive industry, if there are abnormal profits, new firms will enter the market seeing the potential for profits, which will increase the supply of the product, decrease demand, and lower prices. This will continue until profits are driven down to only a normal rate of return, thus eliminating abnormal profits. Therefore, in the long-run, firms in a competitive industry earn only a normal rate of return, and choice C explains this phenomenon.

In the Long-Run,firms in a Competitive Industry Earn Only a Normal