Question

A firm operating under conditions of perfect competition is making supernormal profits. what is likely to happen to the firm in the long run?

a) The firm will continue making supernormal profits in the long run.
b) New firms will enter the market, reducing the price and eliminating supernormal profits.
c) The firm will increase production to maintain supernormal profits.
d) The government will intervene to ensure the firm continues making supernormal profits.

Answer 1

In the long run, new firms will enter the market if a firm in perfect competition is making supernormal profits, which will lead to a decrease in market price and supernormal profits until the firm makes zero economic profits.

Step-by-step explanation:

If a firm operating under conditions of perfect competition is making supernormal profits, it is likely that in the long run, new firms will enter the market, which will increase supply, reduce the market price, and ultimately eliminate the supernormal profits. This is because perfect competition assumes there are no barriers to entry, so when existing firms are making supernormal profits, this acts as a signal for new firms to enter the market.

Consequently, as the market supply increases due to the entry of new firms, the market price will fall, and the firm's profits will normalize until they are making zero economic profits, indicating a long-run equilibrium has been reached where P = MR = MC = AC.