If perfectly competitive firms are making an economic profit,then

Question

Quizplus · Accepted Answer

In a perfectly competitive market, economic profit attracts new firms to enter the industry. This increase in supply causes the market price to decrease, reducing the profits of the existing firms until the economic profit becomes zero. Therefore, in the long run, perfectly competitive firms earn zero economic profit. If in the short run some firms are making positive economic profit, it indicates that there is an excess demand for the product, which will encourage new firms to enter the market in the long run, leading to a decrease in profit for the incumbents. Hence, the correct answer is B, new firms enter the market, and the equilibrium profit of the firms already in the market decreases.

If Perfectly Competitive Firms Are Making an Economic Profit,then