What happens if firms are earning excess profits in purely competitive markets?
A) New firms will enter the market causing market price to rise until excess profits are eliminated.
B) Some firms will leave the market to earn normal profits.
C) New firms will enter the market causing market price to fall until excess profits are eliminated.
D) Some firms will leave the market and some firms will enter the market until costs rise to eliminate the excess profits.

Question

Quizplus · Accepted Answer

In purely competitive markets, excess profits attract new firms because there are no barriers to entry. As new firms enter, the supply increases, leading to a decrease in the market price. This process continues until the excess profits are eliminated and firms earn normal profits.

What Happens If Firms Are Earning Excess Profits in Purely