Which of the following statements is (are) true? i. free entry to a perfectly competitive industry results in the industry's firms earning zero economic profit in the long run, except for the most efficient producers, who may earn economic rent. ii. in a perfectly competitive market, long-run equilibrium is characterized by lmc < p < latc. iii. if a competitive industry is in long-run equilibrium, a decrease in demand causes firms to earn negative profit because the market price will fall below average total cost.
C) I and III
A competitive market is characterized by having many and diverse suppliers, and many and diverse consumers. So no supplier or no consumer is able to dictate market conditions. That means that all suppliers and consumers are price takers (the price is set by the market).
III. If a competitive industry is in long-run equilibrium, a decrease in demand causes firms to earn negative profit because the market price will fall below average total cost.
A perfect competition is characterised by many buyers who sell homogenous products.
All firms in a perfect competition earn zero economic profit in the long run because there are no barriers to entry or exit.
In the long run, equilibrium occurs at: P = LMC = LATC
If demand falls, prices would fall below average total cost and the firm would earn negative profit .