Question

c.) In the long run, a firm operating in a perfectly competitive market will earn zero accounting profit, but can still earn positive economic profit d.) In the short run, a firm should exit the industry if its marginal costs exceeds its marginal revenue e.) In the long run, some firms will exit the market if price is below average total cost. f.) A perfectly competitive firm will consider fixed costs in deciding whether to shut down only if fixed costs are very large.

I need help with parts C and F ONLY.

Answer 1

Ans. C = False, In Long Run Perfectly Competitive Market, Firm earns only Normal Profits (or Zero Economic Profits) due to -

The Free Entry and Exit of the Firms.

means if Firms are earning Super Normal Profits in Short Run, then In Long Run more and more firms would enter the market and this will Raise the Supply Upwards.

Hence, Reducing the Prices and Reducing the Profits as well till it becomes equal to Normal Profits.

Ans. F = False

Shut Down Point would be at the Point where AVC equals MR = MC.

It means that firm is only covering its Variable Costs and Having Losses of Fixed Costs.

And if Firm is Not even able to cover its Variable Costs then the firm should Shut Down.

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