In a perfectly competitive market, economic profit creates an incentive for other firms to do which of the following?

• A. Increase prices above equilibrium
• B. Enter the market
• C. Exit the market
• D. Reduce output to increase profit

Answer: (B)

Verified step by step guidance

1. Understand the concept of economic profit in a perfectly competitive market: Economic profit occurs when total revenue exceeds total costs, including opportunity costs.
2. Recall that in perfect competition, firms are price takers, meaning they cannot influence the market price and must accept the equilibrium price.
3. Recognize that positive economic profit signals that firms are earning more than their normal profit, attracting new firms to enter the market.
4. Know that entry of new firms increases market supply, which tends to push the price down toward the equilibrium where economic profit is zero.
5. Conclude that the incentive created by economic profit is for other firms to enter the market, not to increase prices, exit, or reduce output.