Question

What is the effect of free entry and exit of new firms in the long run to the level of profit under perfect competition?

• A. High profit
• B. No profit
• C. Normal profit
• D. Abnormal profit

Answer 1

The correct option is C

Normal profit

New firms enter into the industry when existing firms make abnormal profit. As a result, the market price will come down to the normal level. Similarly, existing firms will exit when the firms start incurring losses. Entry of new firms will continue until there are only normal profits and the exit of existing firms until the product price will rise. Hence, firms will be able to manage only normal profits in the long run.