Which of the following must be true in the long run equilibrium for a perfectly competitive market?

• A. Price is greater than marginal cost.
• B. Firms produce at a level where average total cost is minimized.
• C. Firms earn zero economic profit.
• D. There are barriers to entry and exit.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the characteristics of a perfectly competitive market in the long run. In such a market, firms are price takers, and there is free entry and exit of firms.
2. Step 2: Recall that in long-run equilibrium, firms produce at the output level where price equals marginal cost (P = MC), ensuring allocative efficiency.
3. Step 3: Recognize that firms also produce at the minimum point of their average total cost (ATC) curve in the long run, which means they operate at the most efficient scale.
4. Step 4: Understand that because of free entry and exit, economic profits are driven to zero in the long run. This means firms earn zero economic profit, covering all opportunity costs but no more.
5. Step 5: Note that barriers to entry and exit do not exist in perfect competition; if they did, firms could sustain positive economic profits, which contradicts the long-run equilibrium condition.