Question

Under conditions of perfect competition, in the long run firms will most likely earn......

• A. normal profits.
• B. positive economic profits.
• C. negative economic profits.
• D. nominal Profit

Hint:

Free entry/exit in the long run drives economic profit toward a specific level.

Answer 1

The Correct Option is A

In a perfectly competitive market, if firms are earning positive economic profits in the short run, new firms are drawn in since entry is free, which increases supply and drives price down until those profits are competed away. If firms are instead losing money, some exit the market, reducing supply and pushing price back up.
This ongoing process of entry and exit continues until, in long-run equilibrium, price settles exactly at average total cost and firms earn zero economic profit, though they still cover every cost, including a normal return on their investment, known as normal profit.
So option 1 is correct.