Question

suppose that in a perfectly competitive market, firms are making economic profits. in the long run, we can expect to see: a. market supply shift to the left. b. the market price rise. c. economic profits become zero. d. some firms leave.

Explanation:

In a perfectly competitive market, there is free entry and exit of firms. When existing firms earn economic profits, new firms are attracted to enter the market. This increases market supply, which pushes the market price down. The price falls until it equals the minimum of the average total cost, at which point firms earn zero economic profits (only normal profits).

• Option a is wrong: supply shifts right, not left, as new firms enter.
• Option b is wrong: market price falls, not rises.
• Option d is wrong: firms enter, not leave, when there are profits.

Answer:

c. economic profits become zero.