Question

In perfect competition, a firm's long-run profits are zero when:

Select the correct answer below:


a.price intersects marginal cost below the average total cost curve

b.price intersects marginal cost at a level equal to the average total cost

c.price intersects marginal cost above the average total cost curve

d.price does not intersect marginal cost

Answer 1

The answer is option B) Price intersects marginal cost at a level equal to the average total cost

Step-by-step explanation:

Under perfect competition, firms can only experience profits or losses in the short run. In the long run, profits and losses are eliminated by an infinite number of firms producing infinitely divisible, homogeneous products.

In a perfectly competitive market in long-run equilibrium, an increase in demand creates economic profit in the short run and induces entry in the long run.

A reduction in demand creates economic losses in the short run and forces some firms to exit the industry causing price to intersects marginal cost at a level equal to the average total cost in the long run.