Economic profit in the long run is:
a. possible for both a pure monopoly and a pure competitor.
b. possible for a pure monopoly, but not for a pure competitor.
c. impossible for both a pure monopolist and a pure competitor.
d. only possible when barriers to entry are nonexistent.
The correct answer and explanation is :
The correct answer is:
b. possible for a pure monopoly, but not for a pure competitor.
Explanation:
In economic theory, profit can be classified into two types: accounting profit and economic profit. Economic profit considers both explicit costs (out-of-pocket costs) and implicit costs (the opportunity costs of the resources used), whereas accounting profit only accounts for explicit costs.
Pure Monopoly:
A pure monopoly is a market structure where a single firm is the sole producer of a good or service with no close substitutes. The key feature of a monopoly is that it has significant barriers to entry, such as high startup costs, control over essential resources, or government regulation that prevents other firms from entering the market. These barriers help the monopoly maintain market power and prevent competition.
In the long run, a monopoly can sustain economic profit because of its market power. The monopolist can set prices above marginal cost, allowing them to earn a profit even after accounting for all costs, including opportunity costs. As long as the barriers to entry remain intact, no new firms will enter the market to erode these profits. Therefore, a pure monopoly can continue to earn economic profit in the long run.
Pure Competition:
A pure competitor operates in a perfectly competitive market where there are many firms offering identical products, and no firm has significant control over the price. In this market, barriers to entry are low, meaning that firms can easily enter or exit the market. In the short run, firms may earn economic profit, but in the long run, the entry of new firms, attracted by these profits, leads to increased supply and lower prices. This process continues until economic profits are eliminated, and firms only earn normal profit (zero economic profit), which is just enough to cover their opportunity costs. As a result, in the long run, economic profit is impossible for a pure competitor.
Thus, economic profit is possible in the long run for a pure monopoly due to barriers to entry, but it is impossible for a pure competitor because of the competition and ease of market entry.