Why is pure competition considered an unsustainable system in the long run?

• A. Firms can easily collude to set prices above marginal cost.
• B. Product differentiation leads to increased market power for individual firms.
• C. Barriers to entry prevent new firms from joining the market.
• D. Firms earn zero economic profit, making it difficult to cover opportunity costs and incentivize continued production.

Answer: (D)

Verified step by step guidance

1. Understand the characteristics of pure competition: many firms, identical products, free entry and exit, and firms are price takers.
2. Recall that in pure competition, firms maximize profit where marginal cost (MC) equals marginal revenue (MR), which equals the market price (P).
3. Recognize that in the long run, the entry and exit of firms drive economic profits to zero, meaning firms earn just enough to cover all opportunity costs.
4. Analyze why zero economic profit implies no incentive for firms to either enter or exit the market, leading to a stable but potentially unsustainable equilibrium if opportunity costs are not fully covered.
5. Conclude that because firms earn zero economic profit in the long run, they may struggle to cover all implicit costs, which can discourage continued production and investment, making pure competition unsustainable over time.