Question

Explain the implication of free entry and free exit of a firm in the perfect competition market.

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Answer 1

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Answer: The implication of free entry and free exit of a firm in the perfect competition market is that in this market structure no company earn an unusual profit. Each company just earns a normal profit.

Answer 2

(I) because of free entry and exit, firm in the long run earn only normal profit (TR =TC).This is how it happens : in case extra normal profit are earn , new firm will join the industry. market supply will increase . market price will fall . extra normal profit will wiped out.

(ii) because during the short period , entry and exit is ruled out , a firm may operate under any of the following situations :

1. normal profit (TR=TC)

2. extra normal profit (TR>TC )

3. extra normal losses (TR <TC)

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