The reason why we expect a perfectly competitive firm to earn zero economic profit in the long run is that
A) there are many buyers in the market.
B) there is a single good of constant quality in the market.
C) all buyers know the market price of the good.
D) all sellers sell the same quality good.
E) factors of production are mobile and can enter or leave the market easily.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, factors of production (such as labor and capital) can enter or exit the market easily. This means that if firms in the market are earning economic profits, more firms will enter the market to take advantage of those profits. As more firms enter, the supply of the good will increase and the market price will fall. This process will continue until all firms in the market are earning zero economic profit. Thus, in the long run, firms in a perfectly competitive market will earn zero economic profit. Choices A, B, C, and D all describe characteristics of a perfectly competitive market, but they do not directly explain why firms in this market will earn zero economic profit in the long run.

The Reason Why We Expect a Perfectly Competitive Firm to Earn