Which of the following is true about firms exiting a perfectly competitive market in the long run?

• A. Firms will exit the market if marginal cost is greater than marginal revenue in the long run.
• B. Firms will exit the market if they are earning normal profit in the long run.
• C. Firms will exit the market if they are making economic losses in the long run.
• D. Firms will exit the market if price equals average total cost in the long run.

Answer: (C)

Verified step by step guidance

1. Understand the concept of long-run equilibrium in a perfectly competitive market, where firms earn zero economic profit (normal profit), meaning price equals average total cost (P = ATC).
2. Recall that firms make decisions to exit the market based on economic profit: if firms are making losses (economic profit < 0), they will exit in the long run.
3. Recognize that marginal cost (MC) compared to marginal revenue (MR) guides short-run production decisions, but long-run exit decisions depend on overall profitability, not just MC and MR.
4. Note that if firms are earning normal profit (zero economic profit), they have no incentive to exit or enter the market, so exiting does not occur in this case.
5. Conclude that the correct condition for firms to exit the market in the long run is when they are making economic losses, i.e., when price is less than average total cost (P < ATC).