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Difficulty: EasyPerfect Competition: Price and Output Determination in Short and Long Run

In the long-run equilibrium of a perfectly competitive market, a firm earns supernormal profit because price exceeds average total cost.

Answer: Answer

Answer

False. In the long-run equilibrium of a perfectly competitive market, firms earn only normal profit (zero economic profit) because price equals minimum average total cost (P=ATCP = \text{ATC}).
The statement is false because free entry and exit under perfect competition drive economic profit down to zero in the long run. At long-run equilibrium, price equals minimum average total cost (P=ATCP = \text{ATC}), so firms make only normal profit.

Step-by-Step Solution

1
Examine the role of entry and exit in a perfectly competitive market.
Freedom of entry allows new firms to join the market whenever short-run economic profits exist (P>ATCP > \text{ATC}).
New entry increases industry supply and lowers market price.
2
Determine the long-run equilibrium price and profit state.
Price drops until P=ATCP = \text{ATC}, where economic profit becomes zero.
Firms achieve long-run equilibrium earning only normal profit.

Key Concept

Long-Run Equilibrium under Perfect Competition
Estimated Time:45s
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Topics

Perfect Competition: Price and Output Determination in Short and Long Run

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