Suppose that the market for sweaters is perfectly competitive. Which of the following statements is true about firms in this market in the long run?

• A. Firms can set prices above the market equilibrium.
• B. Firms can restrict output to increase profits.
• C. Firms will earn zero economic profit.
• D. Firms will produce where marginal cost is less than marginal revenue.

Answer: (C)

Verified step by step guidance

1. Understand the characteristics of a perfectly competitive market: many firms, identical products, free entry and exit, and firms are price takers.
2. Recall that in the long run, firms in perfect competition earn zero economic profit because if there were profits, new firms would enter, increasing supply and driving prices down.
3. Recognize that firms cannot set prices above the market equilibrium price because they are price takers; the market determines the price.
4. Know that firms produce where marginal cost (MC) equals marginal revenue (MR), and in perfect competition, MR equals the market price (P). Therefore, firms produce where MC = MR = P.
5. Conclude that firms cannot restrict output to increase profits in the long run because any attempt to do so would be unprofitable or unsustainable due to free entry and exit.