Explain the process that drives the economic profit to zero in ...

[future617RT]

Explain the process that drives the economic profit to zero in the long run for a perfectly competitive firm.
 
  What will be an ideal response?

Question 2

Based on the cost data in the above table, the long-run average cost (LRAC) is lowest when output is
 
  A) 20.
  B) 40.
  C) 80.
  D) Long-run average cost is constant at all levels of output.

[Kedrick2014]

Answer to Question 1

In the long run, new firms enter a perfectly competitive market if they can make an economic profit. The increased supply causes the price to fall. As long as an economic profit exists, new firms continue to enter, and the price continues to fall until eventually the economic profit equals zero. In the long run, firms leave a perfectly competitive market if they are incurring an economic loss. By exiting, the price rises and the economic loss of the surviving firms shrinks. Eventually enough firms exit so that the price rises to the point that the survivors no longer incur an economic loss, earning instead zero economic profit.

Answer to Question 2

C

[future617RT]

Thank you

[Kedrick2014]

Happy to help you