In a competitive market with two firms, which of the following best describes the outcome in the long run?

• A. Both firms will earn positive economic profit indefinitely.
• B. Both firms will earn zero economic profit due to free entry and exit.
• C. One firm will drive the other out of the market and become a monopoly.
• D. Both firms will collude to maximize joint profits.

Answer: (B)

Verified step by step guidance

1. Understand the characteristics of a perfectly competitive market: many firms, free entry and exit, and identical products.
2. Recall that in the long run, free entry and exit of firms drive economic profits to zero because if firms earn positive profits, new firms enter, increasing supply and lowering prices.
3. Recognize that zero economic profit means firms earn just enough to cover their opportunity costs, so no incentive exists for firms to enter or exit the market.
4. Note that in a competitive market, firms are price takers and cannot influence the market price, so collusion is not a stable outcome.
5. Conclude that the long-run equilibrium outcome is that both firms earn zero economic profit due to free entry and exit, preventing monopolies or sustained positive profits.