In the long-run equilibrium of a market with free entry and exit,what happens to firms

Question

Quizplus · Accepted Answer

In the long-run equilibrium of a market with free entry and exit, firms will produce at the minimum of its average total cost. At this level of production, the firm will be earning normal profits (i.e., zero economic profit). If firms were producing at a level where marginal cost exceeds average total cost in the long run, they would be making losses, prompting them to exit the market and reducing the supply of the good, hence leading to an increase in price. If firms were producing at a level where average total cost exceeds the price of the good, they would still be making losses and exiting the market, leading to an increase in price. If firms were producing where the price of the good equals the minimum of average variable cost, they would only be covering their variable costs and not their fixed costs, leading to zero long-run profits, but still producing at a level where average total cost is not minimized.

In the Long-Run Equilibrium of a Market with Free Entry