Asked by Nicholas Lalla on May 23, 2024
Verified
Which of the following is not an assumption that we make in analyzing pure competition in the long run?
A) Firms are free to enter into or exit from a purely competitive market.
B) We may talk about a "representative" firm by assuming that competitive firms all have identical cost curves.
C) Firms may increase output by expanding their plant sizes.
D) Profits are not relevant to firm behavior anymore, because competitive firms earn zero profits in the long run.
Representative Firm
An idealized company in economic models which is designed to reflect the typical characteristics of a firm within a particular industry.
Cost Curves
Cost curves are graphical representations of the costs associated with producing varying quantities of goods, showing how costs change with changes in output.
Pure Competition
A market structure characterized by a large number of small firms, identical products, and free entry and exit, leading to price determination by market demand and supply.
- Assess the role of cost structures (including MR=MC, ATC, AVC) in determining the firm’s profitability and the market's competitive behavior.
Verified Answer
JS
Jaskaran SinghMay 27, 2024
Final Answer :
D
Explanation :
In the long run analysis of pure competition, it is not assumed that profits are irrelevant to firm behavior. Instead, it is assumed that firms earn normal profits due to free entry and exit in the market, which drives economic profits to zero. However, normal profit is still considered a cost of doing business and is relevant to firm behavior.
Learning Objectives
- Assess the role of cost structures (including MR=MC, ATC, AVC) in determining the firm’s profitability and the market's competitive behavior.