Which statement describes long-run equilibrium under perfect competition?

Which statement describes long-run equilibrium under perfect competition?

• A. Price equals marginal cost and price equals average total cost; profits are positive.
• B. Price equals marginal cost and price exceeds average total cost; profits are losses.
• C. Price equals marginal cost and price equals average total cost; profits are zero.
• D. Price equals average total cost and price less than marginal cost; profits are negative.

Answer: (C)

In long-run equilibrium under perfect competition, firms earn zero economic profit because free entry and exit push profits to the normal level. Each firm sets output where price equals marginal cost (P = MC) since they are price takers and profit is maximized when marginal profit is zero. When many firms operate, the market price must also equal the average total cost (P = ATC) at that output, so that profits are exactly zero. If the price rose above ATC, new firms would enter, increasing supply and driving the price down until profits disappear. If the price fell below ATC, some firms would exit, reducing supply and driving the price up until profits disappear. So the long-run equilibrium condition is P = MC = ATC, with profits equal to zero.

In long-run equilibrium under perfect competition, firms earn zero economic profit because free entry and exit push profits to the normal level. Each firm sets output where price equals marginal cost (P = MC) since they are price takers and profit is maximized when marginal profit is zero. When many firms operate, the market price must also equal the average total cost (P = ATC) at that output, so that profits are exactly zero. If the price rose above ATC, new firms would enter, increasing supply and driving the price down until profits disappear. If the price fell below ATC, some firms would exit, reducing supply and driving the price up until profits disappear. So the long-run equilibrium condition is P = MC = ATC, with profits equal to zero.