In a perfectly contestable market in the long run, each firm
A)produces at the minimum point on its long-run average total cost curve.
B)earns a profit below its opportunity cost of capital.
C)avoids making capital expenditures.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

In a perfectly contestable market, there are no barriers to entry or exit, so firms cannot earn profits above their opportunity cost of capital in the long run. This means that each firm produces at the minimum point on its long-run average total cost curve, where price equals marginal cost, and earns a profit equal to zero. Firms cannot avoid making capital expenditures if they want to remain competitive.

In a Perfectly Contestable Market in the Long Run, Each