Long-run competitive equilibrium:
a. is realized only in constant-cost industries.
b. will never change once it is realized.
c. is not economically efficient.
d. results in zero economic profits.
The correct answer and explanation is :
The correct answer is d. results in zero economic profits.
Explanation:
In a perfectly competitive market, the long-run competitive equilibrium is a condition where firms in the market earn zero economic profits. This is a result of the following factors:
- Entry and Exit of Firms: In the long run, firms are free to enter and exit the market. If firms are earning positive economic profits, new firms are attracted to the market because they see the opportunity to earn profits. This increases market supply, which in turn drives down prices until the economic profit for each firm is eliminated. Conversely, if firms are incurring losses, some firms will exit the market, reducing supply and pushing prices up until the remaining firms break even.
- Zero Economic Profits: Economic profit refers to the difference between a firm’s total revenue and its total costs, where total costs include both explicit costs and implicit costs (opportunity costs). In the long-run equilibrium, firms only earn enough revenue to cover their total costs, including the opportunity costs of the resources used in production. In other words, the revenue is just equal to the total costs, leaving no extra profit for the firm. This situation is known as earning zero economic profits or normal profits, where the firm is covering all costs, but there’s no incentive for new firms to enter or for existing firms to leave.
- Efficient Allocation of Resources: In a competitive equilibrium, resources are allocated in such a way that no one can be made better off without making someone else worse off. This is the condition for economic efficiency. Hence, the equilibrium is also economically efficient, as firms are producing at the lowest possible cost, given the available technology.
Thus, the long-run competitive equilibrium is characterized by zero economic profits, and any deviation from this equilibrium will lead to market adjustments that bring the system back to this point.