In a perfectly competitive market, the process of entry and exit will end when firms in the market:

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BlackTom AI · Accepted Answer

When analyzing a perfectly competitive market, the dynamics of entry and exit hinge on profits. 
Option 1: 'experience decreasing marginal revenue' is misleading in this context. In perfect competition, each firm is a price taker, so marginal revenue equals the market price and does not systematically decline due to entry or exit. The key driver of entry/exit is profits, not a changing marginal revenue curve for an individual firm.
Option 2: 'capture market power' cannot occur in perfect competition. Firms are price takers with no ability to influence the market price, so entry and exit are driven by profit signals rather than attempts to seize market power. This statement mischaracterizes the nature of competition.
Option 3: 'are making zero economic profit' is the standard long-run outcome in a perfectly competitive market. When firms earn positive economic profits, new entrants join, increasing supply and driving price down until profits are zero. Conversely, if profits are negative, firms exit, reducing supply and restoring zero profits for the remaining firms. Thus, zero economic profit marks the point where entry and exit stop.
Option 4: 'are operating with excess capacity' is not the defining mechanism that ends entry and exit in perfect competition. Excess capacity may exist in the short run for individual firms due to fixed costs and production adjustments, but the long-run equilibrium condition that ends entry and exit is zero economic profit, not a universal state of excess capacity across all firms.

In a perfectly competitive market, the process of entry and exit will end when firms in the market:

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