Question

In the long run a firm in a perfectly competitive market earns _________.

• A. normal profit
• B. abnormal profit
• C. average profit of the past five years
• D. at least 15% profit on capital employed

Answer 1

The correct option is A normal profit

Under perfect competition, there is freedom of entry and exit of firms. Therefore, when there is super-normal profits in the market the new firms tend to enter the market to get the benefit of such profits due to which the supply of the commodity is increased and price falls and when there is super-normal loss in the market the new firms tend to exit the market to avoid such losses due to which the supply of the commodity is decreased and price increases respectively. Due to these entry and exit mechanism, the firms in the market only earn normal profits in the long run.