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Assumptions about Perfectly Competitive Markets

Why can a fir...

Question

Why can a firm not earn abnormal profits under perfect competition in the long-run? Explain.

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Solution

There is freedom of entry and exit of firms under perfect competition. In situations of abnormal profits, new firms will be induced to join the industry. This increases market supply and lowers market price to finally wipe out abnormal profits. So, a firm cannot earn abnormal profits under perfect competition in the long-run.

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