In the theory of perfect competition, the assumption of easy entry into and exit from the market implies <u>zero economic profits in the long run.</u>
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<h3>What Is Perfect Competition?</h3>
The term perfect competition refers to a theoretical market structure. In a perfect competition model, there are no monopolies.
This kind of structure has a number of key characteristics, including:
- All firms sell an identical product (the product is a commodity or homogeneous).
- All firms are price takers (they cannot influence the market price of their products).
- Market share has no influence on prices.
- Buyers have complete or perfect information (in the past, present, and future) about the product being sold and the prices charged by each firm.
- Capital resources and labor are perfectly mobile.
- Firms can enter or exit the market without cost.
There are five assumptions in the perfectly competitive model of markets:
- Goods are identical, rival, and excludable.
- Buyers and sellers have sufficiently information to make informed decisions.
- There are no external effects; and two others. List the two other assumptions and discuss their significance in a sentence or two.
- Everyone is a price taker.
- There is free entry and exit.
The price taking assumption implies the demand perceived by a seller is perfectly elastic. That is, they can sell as much or as little as they want without affecting the market price. Also, when the firm is a price taker, the profit maximizing rule: MR = MC, can be written P = MC since price equal marginal revenue in perfect competition. The market output where price equals marginal cost is the level the level of output where the sum of consumer and producer surplus is maximized.
The free entry and exit assumption insures economic profits are zero in the long-run and more importantly, resources are perfectly mobile in response to a change in demand or supply conditions.
If demand for a good increases, for example, firms will experience short-run profits, which will induce an expansion of the industry. The increased supply lowers price until profits are zero for the typical supplier.
Therefore, we can conclude that the correct option is C.
Your question is incomplete, but most probably your full question was:
In the theory of perfect competition, the assumption of easy entry into and exit from the market implies
a. positive economic profits in the long run.
b. losses in the long-run equilibrium.
c. zero economic profits in the long run.
d. zero economic profits in both the short run and the long run.
e. positive economic profits in both the short run and the long run.
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