Explore BrainMass
Share

Why firms earn zero profit in perfectly competitive markets.

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Explain why a firm in a perfectly competitive market would choose to remain in business, if its profit is zero at equilibrium. Illustrate any theories or concept you decide to use to answer this question with numerical examples.

The analysis of zero profit conditions showed that firms might remain in business for a time despite being unprofitable. This situation is possible particularly for firms with high fixed capital costs. The long run price must cover out of pocket costs such as labour, materials, equipment, taxes, and other expense, along with opportunity costs such as competitive return on the owner's invested capital.

© BrainMass Inc. brainmass.com October 16, 2018, 10:32 pm ad1c9bdddf
https://brainmass.com/economics/short-and-long-run-cost-functions/why-firms-earn-zero-profit-in-perfectly-competitive-markets-224236

Solution Preview

Explain why a firm in a perfectly competitive market would choose to remain in business, if its profit is zero at equilibrium. Illustrate any theories or concept you decide to use to answer this question with numerical examples.

When the firms costs are calculated they include opportunity costs. So, when a firm is at the bottom of its ATC and charging a ...

Solution Summary

The solution contains an explanation for why in the long run firms earn zero economic profit. Economic profits are distinguished from accounting profits. The break even point, shutdown point, and long run vs. short run decisions are discussed as well.

$2.19
Similar Posting

Perfect Competition: Long Run

(See attached file for full problem description)

---
Exhibit 2 depicts the market conditions experienced by representative firms in three different price-taker markets. Replicate the diagrams below and answer the following questions.

a. Which one of the conditions is true for a representative firm in the apple industry:
P>ATC, P<ATC or P=ATC? Is the firm earning economic profit, economic loss or normal rate of return in the Short Run? What would you expect to happen to the number of firms in this industry in the Long Run? Indicate in the diagram the profit-maximizing level of output and shade in the area corresponding to the firm's economic profit/loss, if any.
b. Which one of the conditions is true for a representative firm in the banana industry:
P>ATC, P<ATC or P=ATC? Is the firm earning economic profit, economic loss or normal rate of return in the Short Run? What would you expect to happen to the number of firms in this industry in the Long Run? Indicate in the diagram the profit-maximizing level of output and shade in the area corresponding to the firm's economic profit/loss, if any.
c. Which one of the conditions is true for a representative firm in the corn industry:
P>ATC, P<ATC or P=ATC? Is the firm earning economic profit, economic loss or normal rate of return in the Short Run? Will this firm stay in the market in the Short Run? In the Long Run? What would you expect to happen to the number of firms in this industry in the Long Run? Indicate in the diagram the profit-maximizing level of output and shade in the area corresponding to the firm's economic profit/loss, if any.

[Note: in Perfect Competition
a. Price Takers
Price Takers - face horizontal demand for their product
- Producers whose actions have no effect on the market price of the good he/she sells.
- Consumers whose actions have no effect on the market price of the good he/she buys.]
---

View Full Posting Details