In a perfectly competitive market, why must economic profits be zero in the long-run equilibrium?

• A. Because firms always collude to set prices at the break-even point.
• B. Because government regulation sets prices so that firms cannot earn profits.
• C. Because consumer demand always matches the supply exactly, eliminating profits.
• D. Because free entry and exit ensure that firms enter when profits are positive and exit when profits are negative, driving profits to zero.

Answer: (D)

Verified step by step guidance

1. Understand the concept of economic profit, which is total revenue minus total costs, including both explicit and implicit costs.
2. Recognize that in a perfectly competitive market, there are many firms, and each firm is a price taker with no control over the market price.
3. Analyze the role of free entry and exit: if firms are earning positive economic profits, new firms will enter the market, increasing supply and driving the price down.
4. Conversely, if firms are experiencing losses (negative economic profits), some firms will exit the market, reducing supply and causing the price to rise.
5. In the long-run equilibrium, this entry and exit process continues until economic profits are zero, meaning firms earn just enough to cover all their costs, including opportunity costs.