In a perfectly competitive market, the process of entry and exit will end when:

• A. firms are earning positive economic profits
• B. marginal cost equals marginal revenue for only some firms
• C. economic profits are zero for all firms
• D. market price is greater than average total cost

Answer: (C)

Verified step by step guidance

1. Understand the concept of economic profit: Economic profit is the difference between total revenue and total costs, including both explicit and implicit costs. Positive economic profits attract new firms to enter the market, while negative profits cause firms to exit.
2. Recall the characteristics of a perfectly competitive market: Firms are price takers, and the market price is determined by the intersection of market supply and demand. Firms maximize profit where marginal cost (MC) equals marginal revenue (MR), and in perfect competition, MR equals the market price (P).
3. Analyze the entry and exit process: If firms are earning positive economic profits, new firms will enter the market, increasing supply and driving the price down. If firms are incurring losses, some will exit, reducing supply and driving the price up.
4. Identify the equilibrium condition for entry and exit: The process stops when firms earn zero economic profit, meaning total revenue equals total cost (including opportunity costs). At this point, no incentive exists for firms to enter or exit the market.
5. Express the zero economic profit condition mathematically: At equilibrium, price equals average total cost (P = ATC), and marginal cost equals marginal revenue (MC = MR = P). This ensures firms cover all costs but earn no extra economic profit.