Question

The market for pizza is perfectly competitive and has​ 1,000 firms. Each firm is identical. Describe each firm in​ long-run equilibrium. In​ long-run equilibrium, each firm is​ _______.

A. just covering total variable cost
B. incurring an economic loss
C. making positive economic profit
D. making zero economic profit

Answer 1

The correct answer is option D.

Step-by-step explanation:

In a perfectly competitive market, firms can have positive economic profits only in the short run. In the long run, though, the firms can enter and exit the market, so if some firms among the 1,000 are having profits, it will attract potential firms to join the market.

This causes the market supply to increase. This increase in supply reduces prices and profits.

Similarly, if some of the firms among 1,000 are having losses in the short run, then in the long run, the firms incurring losses exit the market. This reduces market supply and thus increases price and profits.

This process continues until all the firms are having zero economic profits.