Question

If a perfectly competitive industry is in long-run equilibrium, then which of the following is true?

A.Price equals minimum average cost.
B.Price equals minimum marginal cost
C.Accounting profits for all firms are zero
D.Economic profits for all firms are positive

Answer 1

The correct answer is option A. Price equals minimum average cost.

Step-by-step explanation:

In a perfectly competitive industry that is in long-run equilibrium, price equals the minimum average cost. This is because when a firm is earning positive economic profits, new competitors will enter the market, which will drive the original firm's demand down until price equals average cost, resulting in zero economic profits. In the long-run equilibrium, firms produce at an output level where price (P) is equal to marginal cost (MC) and average cost (AC), ensuring there's no incentive for firms to enter or leave the market.

Therefore, option A: 'Price equals minimum average cost' is correct. It is important to distinguish between economic profits and accounting profits; zero economic profit means the firm's resources are earning just as much as they could in their next best alternative use, which may still allow for positive accounting profits.