In the long run, a perfectly competitive firm earns zero economic profit; price equals minimum ATC.

In the long run, a perfectly competitive firm earns zero economic profit; price equals minimum ATC.

• A. Price equals minimum average total cost.
• B. Price equals marginal cost.
• C. Price equals average variable cost.
• D. Price equals total cost.

Answer: (A)

In the long run, perfect competition with free entry and exit pushes profits to a normal level, so a firm earns zero economic profit. That means price must cover all costs, including a normal return to entrepreneurship. Economically, this is captured by price equaling average total cost. Because the average total cost curve is U-shaped, its minimum occurs at the point where marginal cost equals average cost. When price sits at that minimum ATC, the firm earns zero economic profit, since revenue per unit just covers the total cost per unit. While price equaling marginal cost describes how firms choose output to maximize profit in the short run, it does not guarantee zero economic profit in the long run. Price equaling average variable cost would imply covering only variable costs, ignoring fixed costs, which isn’t sufficient for zero profit in the long run. And price equaling total cost isn’t the price you compare to in profit analysis. So the condition that best describes zero economic profit in the long run is price equals the minimum average total cost.

In the long run, perfect competition with free entry and exit pushes profits to a normal level, so a firm earns zero economic profit. That means price must cover all costs, including a normal return to entrepreneurship. Economically, this is captured by price equaling average total cost. Because the average total cost curve is U-shaped, its minimum occurs at the point where marginal cost equals average cost. When price sits at that minimum ATC, the firm earns zero economic profit, since revenue per unit just covers the total cost per unit.

While price equaling marginal cost describes how firms choose output to maximize profit in the short run, it does not guarantee zero economic profit in the long run. Price equaling average variable cost would imply covering only variable costs, ignoring fixed costs, which isn’t sufficient for zero profit in the long run. And price equaling total cost isn’t the price you compare to in profit analysis. So the condition that best describes zero economic profit in the long run is price equals the minimum average total cost.