In the diagram below, a firm is operating in an imperfect marketThe firm will only make normal profits in the long-run when

Question

BlackTom AI · Accepted Answer

To understand when a firm in an imperfect market earns normal profits in the long run, we need to consider how profits are driven to zero by entry and exit. In the long run, if firms in the industry make profits (price above average cost), new firms will enter, shifting supply and pushing the price down until profits disappear. Conversely, if firms incur losses (price below average cost), some firms will exit, reducing supply and pushing the price up until losses disappear.

In this context, normal profit occurs precisely when price is equal to average cost, so that total revenue just covers all costs, including the opportunity cost of the entrepreneur’s capital. This condition is P = AC, which in the diagram corresponds to the AR (price) line intersecting the minimum of the LRAC (average cost) or at a tangent where AR = AC.

Option: AR = AC. This reads as price equals average cost, which indicates zero economic profit in the long run. Why this is correct: with free entry and exit characteristic of many imperfect markets, firms cannot sustain profits above zero in the long run, because any such profits attract new entrants until profits are eroded to zero; at the same time, losses push exits until only normal profits remain. Hence AR = AC ensures the firm earns a normal return, not an supernormal profit or a loss.

Why not AR > AC? If AR were greater than AC, the firm would be earning positive economic profit, drawing in new entrants and expanding supply, which would lower the price until profits fall back toward zero. The same logic applies in reverse for AR < AC: losses would trigger exit and reduce supply, raising the price back to the point where AR = AC.

In summary, in the long run within an imperfect market framework, normal profits arise where price equals average cost (AR = AC), ensuring zero economic profit after entry and exit have adjusted the market. The key mechanism is the adjustment of market supply through entry and exit until profits are exactly normal.

In the diagram below, a firm is operating in an imperfect marketThe firm will only make normal profits in the long-run when

View Explanation

Log in for full answers

Similar Questions

A monopolist must obtain a minimum of a(n) profit in the long run, or it will go out of business.

The table below provides cost and revenue information for a firm producing hand-made cups. At what level of output does the firm earn normal profit?

The table below provides cost and revenue information for a firm producing hand-made cups. At what level of output does the firm earn normal profit?

In the diagram below, a firm is operating in an imperfect marketThe firm will only make normal profits in the long-run when

Normal profit occurs when

The level of profit that occurs when total revenue is equal to total cost is defined as:

75. Normal profit is A. determined by subtracting implicit costs from total revenue. B. determined by subtracting explicit costs from total revenue. C. the return to the entrepreneur when economic profits are zero. D. the average profitability of an industry over the preceding 10 years.

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler