In the long run, firms in a competitive market will tend to:a) Produce at the point of minimum average variable costb) Achieve economies of scopec) Earn normal profitsd) Create artificial barriers to entry for new firms
Question
In the long run, firms in a competitive market will tend to:a) Produce at the point of minimum average variable costb) Achieve economies of scopec) Earn normal profitsd) Create artificial barriers to entry for new firms
Solution
In the long run, firms in a competitive market will tend to c) Earn normal profits.
Here's why:
In a perfectly competitive market, firms are price takers and have no market power. They cannot influence the price of the product or service. In the long run, new firms will enter the market if the incumbent firms are making super-normal profits. This will increase the supply of the product or service, which will reduce the market price.
Conversely, if firms are making losses, some firms will exit the market, which will reduce the supply and increase the market price. This process will continue until firms are making just normal profits. Normal profit is a situation when a firm is covering all its costs including opportunity costs.
Therefore, in the long run, firms in a competitive market will tend to earn normal profits.
The other options are not typically characteristics of firms in a perfectly competitive market.
a) Firms do not necessarily produce at the point of minimum average variable cost. They produce where marginal cost equals marginal revenue.
b) Economies of scope refer to a situation where it is cheaper to produce two or more products together rather than separately. This is not a characteristic of perfectly competitive markets, which are characterized by many firms producing identical products.
d) In a perfectly competitive market, there are no barriers to entry. Therefore, firms do not create artificial barriers to entry for new firms.
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