Suppose a perfectly competitive ﬁrm is making supernormal proﬁts. What is likely to happen in the long run?
A) The ﬁrm will have to shut down production.
B) The ﬁrm can increase its supernormal proﬁts if it increases its output.
C) The ﬁrm will continue to make supernormal proﬁts.
D) New entrants will compete away the ﬁrm's supernormal proﬁts.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, supernormal profits attract new entrants, increasing supply and driving down prices until only normal profits are made.

Suppose a Perfectly Competitive ﬁRm Is Making Supernormal Proﬁts