Question

Lilly is the price-taking owner of an apple orchard. The price of apples is high enough that Lilly is earning positive economic profits. In the long run, Lilly should expect _____ apple prices due to the _____ firms.

Answer 1

In the long run, Lilly should expect A DECREASE IN apple prices due to the ENTRANCE OF NEW COMPETING firms.

Step-by-step explanation:

In perfectly competitive markets, in the long run firms will only be able to make accounting profits but zero economic profits.

Economic profits are defined as earning higher revenues than accounting costs and implicit costs (opportunity costs). This means that the firms are obtaining higher results from the invested capital than the rest of the market.

Accounting profits are simply revenues - accounting costs (e.g. variable and fixed costs).

A firm maximizes its accounting profit when marginal revenue (MR) = marginal costs (MC), but at that point, economic profits should also equal 0.