Properties of long-run competitive equilibrium with free entry include
A) The equilibrium price must equal the minimum MC
B) Firms must earn zero profits
C) Active firms must produce at their maximum scale of production
D) All of these

Question

Quizplus · Accepted Answer

In long-run competitive equilibrium with free entry, firms earn zero economic profits. This occurs because if firms were earning positive profits, new firms would enter the market, increasing supply and driving down prices and profits until they reach zero. The equilibrium price equals the minimum of average total cost (ATC), not necessarily the minimum of marginal cost (MC). Firms produce where price equals marginal cost (P=MC), which is also where MC intersects ATC at its minimum in long-run equilibrium, but this does not imply they are at their maximum scale of production.

Properties of Long-Run Competitive Equilibrium with Free Entry Include