Question

Balin’s Burger Barn operates in a perfectly competitive market. Balin’s is currently earning economic profits of $20,000 per year. Based on this information, we can conclude that

A. Balin’s is operating in the short run, but not the long run.
B. Balin’s profits will discourage new firms from entering.
C. Balin’s is operating in the long run.
D. Balin’s will increase its market price over the coming months.

Answer 1

Balin's Burger Barn is likely operating in the short run because, in the long run, economic profits in a perfectly competitive market would attract new firms and be driven down to zero.

Step-by-step explanation:

Balin's Burger Barn's situation of earning economic profits of $20,000 per year in a perfectly competitive market suggests that the firm is operating in the short run. In the long run, these profits will attract new firms into the market, increasing supply and driving down the market price until firms earn zero economic profits.

This is due to the nature of perfect competition, where firms can enter and exit the market freely, and in the long run, they produce at the output level where price (P) equals marginal revenue (MR), marginal cost (MC), and average cost (AC).

Therefore, the correct conclusion from the information provided is that Balin's is likely operating in the short run, but not the long run, because if they were in the long run, economic profits would have already been eroded due to new entrants in the market.