Question

Free entry and exit of firms in a perfectly competitive market indicates a) P = Min AC
b) P less than AC
c) P more than AC
d) None of the above

Answer 1

Answer:

d is correct answer.....

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Answer 2

In a perfectly competitive market with free entry and exist of firms,the existing firms operate at the where price(P) is equal to the minimum level of average cost(AC).Hence,the correct answer is option a) or P=Min AC.

Explanation:

In the short run,a perfectly competitive firm maximizes its profit by the producing its output at the level where P is equal to the MC or marginal cost of production or the cost/expense of producing one more unit of the output in concern.However,in the short run,the competitive does not necessarily operate where MC is equal to AC signifying the minimum level or point of AC.Any short run earned in the perfectly competitive market will attract new firms to enter the market in the long run due to free entry and exit of the firms which causes a reduction in price or P and will compel all the existing firms to operate or produce at the point where P is equal to MC which is equal to AC or P=MC=minimum A.This also indicates the minimum point or level of AC in the long run.