Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
In the short run, firms can earn economic profits, but in the long run, profits are driven to zero due to market entry.
B
In the short run, firms cannot adjust their output, while in the long run, they can adjust their production levels freely.
C
In the short run, prices are fixed, but in the long run, they are flexible and determined by consumer demand.
D
In the short run, firms experience diminishing returns, but in the long run, they achieve constant returns to scale.
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive market, short-run equilibrium occurs when firms can make profits or losses based on market prices. In the short run, if the market price is higher than the average cost of production, firms will earn profits, attracting more firms into the market. However, in the long run, the entry of new firms will increase supply, which will drive the price down until it equals the average cost, leading to zero economic profit for all firms. For example, if a firm makes a profit by selling a product at $10 while its cost is $8, other firms will enter the market, increasing competition and lowering the price. In the long run, firms will only cover their costs and earn normal profits, meaning they will not make extra money beyond what they need to stay in business.
Detailed Explanation
In the short run, companies can make extra money, called economic profits. Other options are incorrect because This answer suggests that companies can't change how much they produce in the short run; This option says prices are fixed in the short run.
Key Concepts
Long-run equilibrium
Short-run equilibrium
Price determination
Topic
Profit Maximization in Perfect Competition
Difficulty
hard level question
Cognitive Level
understand
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