The long-run perfectly competitive equilibrium
is realized only in constant-cost industries.
is not economically efficient.
results in normal profits.
will never change once it is realized.
The correct answer and explanation is :
The correct answer is “results in normal profits.”
In a perfectly competitive market, firms enter and exit the market freely. In the long run, when the market reaches equilibrium, firms will adjust their output and prices such that they only earn “normal profits” — the minimum amount needed to keep them in business. These normal profits reflect the opportunity cost of the resources employed in production, meaning the firms are covering their costs, including both explicit and implicit costs, but they do not earn an economic profit.
Here’s why “normal profits” is the correct answer and why the other options are incorrect:
- Constant-cost industries: While it’s true that long-run equilibrium in a perfectly competitive market can be analyzed in the context of constant, increasing, or decreasing cost industries, this does not mean that long-run equilibrium is only achieved in constant-cost industries. In the case of constant-cost industries, the entry or exit of firms does not affect the market prices, so firms continue to earn normal profits. In contrast, in increasing or decreasing cost industries, long-run equilibrium can still result in normal profits, but the price may adjust due to changes in resource availability or costs.
- Economic efficiency: The long-run equilibrium in a perfectly competitive market is indeed economically efficient. This is because resources are allocated in such a way that consumer and producer surplus are maximized, and firms operate at their lowest possible cost. In this scenario, no resources are wasted, and the quantity of goods produced is what consumers demand at the lowest possible price. Therefore, the statement that long-run perfectly competitive equilibrium is not economically efficient is incorrect.
- Will never change: The long-run equilibrium can change. If there are shifts in demand or supply, changes in production technology, or alterations in input prices, the market can move to a new equilibrium, potentially affecting the number of firms in the market and the price level. Therefore, the equilibrium is not static and may change over time.
Thus, in the long run, firms in a perfectly competitive market earn normal profits as a result of free entry and exit, where no firm has an incentive to either enter or exit the market.