Question

A competitive firm cannot earn supernormal profit in the long run because __________.

• A. LMC = LMR
• B. new firms are to be attracted to the industry
• C. the entry of new firms is restricted
• D. both (A) and (B)

Answer 1

Answer: (B)

new firms are to be attracted to the industry

Due to free entry and exit in the industry, if the firms in the short run make super normal profits this will act as a signal and new firms will enter the industry. This will increase the supply in the market and thus the price will move back to the point where P = MC and the firm will make normal profits in the long run.