For a competitive market in the long run,
A)Economic losses induce firms to shut down.
B)Economic profits induce firms to enter until profits are normal.
C)Accounting profit is zero.
D)Economic profit is positive.

Question

Quizplus · Accepted Answer

In a competitive market in the long run, economic profits induce firms to enter until profits are normal. This is because in the long run, there are no barriers to entry or exit, and firms can enter or exit the market freely. When economic profits are being earned, it signals to potential entrants that there is an opportunity to earn above-normal profits. As new firms enter the market, the supply of the good or service increases, which lowers the market price and reduces the economic profits of existing firms. This process continues until all firms are earning only normal profits, which is the minimum level of profit necessary to keep them in business. Economic losses, on the other hand, induce firms to shut down because they cannot cover their variable costs of production. The accounting profit may be zero or positive, but in the long run, economic profit is zero.

For a Competitive Market in the Long Run