If a perfectly competitive firm made an economic profit in the short run, but not in the long run, it must be true that
A) prices for inputs increased
B) demand declined
C) new firms entered, supply increased, and price fell
D) accounting profit exceeds economic profit
E) labor costs are increasing

Question

Quizplus · Accepted Answer

In a perfectly competitive market, if a firm is making an economic profit in the short run, it attracts new firms into the market. This increases the supply of the product, which leads to a decrease in the price. As the price falls, the economic profit of the existing firms decreases until it reaches zero in the long run, assuming all firms are identical. This process is described in choice C.

If a Perfectly Competitive Firm Made an Economic Profit in the Short