The entry and exit of firms in a perfectly competitive market is mostly dependent on ________.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms earn zero economic profit in the long run due to the ease of entry and exit. Therefore, the profitability of the existing firms plays a significant role in attracting or deterring new firms from entering or staying in the market. If existing firms are making high profits, it will attract new firms to enter the market, resulting in increased competition and a reduction in profits for all firms. If existing firms are making losses or earning zero profit, it will encourage them to exit the market, reducing competition and increasing the profitability of the remaining firms. Therefore, the entry and exit of firms in a perfectly competitive market mostly depend on the profitability of the existing firms.

The Entry and Exit of Firms in a Perfectly Competitive