Final answer:
In a competitive market, firms earn zero economic profits in the long run due to the forces of entry and exit. Despite this, people may still invest in competitive firms for non-economic motives, long-term growth potential, and diversification.
Step-by-step explanation:
In a competitive market, firms earn zero economic profits in the long run due to the forces of entry and exit. If a firm earns economic profits, it will attract more competitors to enter the market, which will lead to increased competition and drive down profits. Similarly, if a firm is suffering losses, some firms may exit the market, reducing competition and eventually driving profits up to zero.
Despite earning zero economic profits, there are still several reasons why people would invest money in competitive firms:
- Non-economic motives: Some individuals may invest in competitive firms due to non-economic motives, such as personal passion, philanthropy, or social impact.
- Long-term growth: While a competitive firm may not earn significant profits in the short run, investors may believe in the long-term growth potential of the industry or the firm itself. They may anticipate that the industry will experience favorable changes, such as increased demand or technological advancements, leading to future profits.
- Diversification: Investors may choose to invest in a mix of firms across different industries, including competitive ones, to diversify their investment portfolios and spread risk.