In models with perfect competition:
A) economic profits are always positive.
B) accounting profits are zero.
C) income paid to labor is the same as is paid to capital.
D) the real interest rate is equal to the nominal interest rate.
E) economic profits are zero.

Question

Quizplus · Accepted Answer

In models with perfect competition, economic profits are driven to zero in the long run due to the absence of barriers to entry and exit. Accounting profits may still exist, but they would be equal to zero in the long run as well due to competition driving prices down to the level of production costs. In perfect competition, labor and capital both receive their marginal product, which may not necessarily be the same, but would be balanced out in the long run by the flexibility of resources to move between industries. The real interest rate and nominal interest rate are not necessarily equal in perfect competition, as inflation can affect the real interest rate.

In Models with Perfect Competition