A purely competitive firm is precluded from making economic profits in the long run because
A) it is a "price taker."
B) its demand curve is perfectly elastic.
C) of unimpeded entry to the industry.
D) it produces a differentiated product.

Question

Quizplus · Accepted Answer

A purely competitive firm is one of many firms in the industry, and because of unimpeded entry into the industry, the firm cannot make economic profits in the long run. New firms will enter the market if they see the opportunity to make profits, increasing the supply and driving down the price until the firms in the industry are earning only normal profits. Therefore, the competitive firm is precluded from making economic profits in the long run because of unimpeded entry to the industry. Choices A and B are characteristics of a purely competitive firm but do not explain why it cannot make economic profits in the long run. Choice D mentions a differentiated product, which is not a characteristic of a purely competitive firm.

A Purely Competitive Firm Is Precluded from Making Economic Profits