Question

Which of the following statements accurately explains why profits for firms in a perfectly competitive industry tend to vanish in the long run? - The demand for products falls over time, so firms are unable to generate revenue. - Prices drop when other perfectly competitive firms see an opportunity to earn profits and enter the market. - Firms that experience losses try to increase supply to cover their costs, leading to zero profits.

Answer 1

Prices drop when other perfectly competitive firms see an opportunity to earn profits and enter the market.

Step-by-step explanation:

In a perfectly competitive market, firms can freely enter and exit the market in the long run.

Short run is too short for firms to enter or exit. So when the existing firms enjoy profits in the short run, this attracts the potential firms to enter the market in the long run.

As new firms join the market, market supply increases. This causes the market supply curve to shift to the right. The price level falls.

This causes the market share and profits of firms to decline.