Question

When will the entry and exit of firms in the market stop?

• A. When firms are earning supernormal profit
• B. When the firms are earning normal profit
• C. When firms are experiencing loss
• D. None of these

Hint:

In a competitive market, firms will enter when supernormal profits are available and exit when they can only earn a normal profit.

Answer 1

The Correct Option is B

Step 1: Understanding market dynamics.
In a perfectly competitive market, firms enter when they see an opportunity for profit and exit when they cannot earn at least a normal profit. A normal profit occurs when total revenue equals total costs, including opportunity costs, and no firm has an incentive to enter or leave the market.

Step 2: Analyzing the options.
(A) When firms are earning supernormal profit: Firms will enter the market when supernormal profits exist, but entry will stop once normal profits are reached.
(B) When the firms are earning normal profit: Correct. In the long run, firms will enter and exit the market until they are earning only normal profits, and no further entry or exit will occur.
(C) When firms are experiencing loss: If firms are experiencing a loss, they will exit the market until supply is reduced and the price rises.
(D) None of these: This option is incorrect, as the correct answer is (B).

Step 3: Conclusion.
The correct answer is (B) When the firms are earning normal profit, as this represents the equilibrium point where no new firms will enter or exit the market.