Question

When all firms earn zero economic profits producing the output level where P=MR=MC and P=AC and there is no incentive to leave or join the market, the market is in __________.

Answer 1

The correct answer is: long-run equilibrium.

Step-by-step explanation:

To begin with, the market that is refered in the question is a perfect competitive one, you can tell by the fact that the price equals the marginal revenue(MR) and that equals the marginal costs(MC) and also the price equals the average cost and that combination only happens in the competitive market and therefore that the relationship established happen when that industry is in the long run equilibrium and there is no incentive to leave or join the market.

Answer 2

Long-run equilibrium.

Step-by-step explanation:

When all firms earn zero economic profits producing the output level where P=MR=MC and P=AC and there is no incentive to leave or join the market, the market is in long-run equilibrium.

In a perfectly competitive market in long-run equilibrium, a long-run equilibrium avails firms the opportunity to adjust all inputs and all fixed costs are maximized. Also, it's characterized by free entry and exit, as such there isn't a fixed number of firms. This simply means that, since the number of firms in a long-run equilibrium can change, a firm must exit the market as a result of losses i.e when the firm is unable to cover its fixed costs in the long-run while new firms are allowed entry into the market when it anticipates potential profits or gains.

However, the firms always strive to maximize profits by increasing their level of output, such that P = MC. Also, the firms wouldn't be willing to leave or enter into the market because they are not making any profit, such that P=AC.

In a nutshell, in the long run equilibrium P=MR=MC and P=AC.

Where, P represents the price.