In perfectly competitive firms, there is zero profit. This is true only in the:

• A. Short run
• B. Long run
• C. At equilibrium
• D. When demand is constant

Answer: (B)

In a perfectly competitive market, profits are driven to zero in the long run by free entry and exit. If firms earn positive profits in the short run, new firms enter, increasing supply and pushing the price down until those profits disappear. If firms incur losses, some exit, reducing supply and pushing the price up until losses vanish. In the long-run equilibrium, price equals the minimum of average total cost, with MR = MC = P, so economic profit is zero (firms earn only normal profits). That’s why zero profit is a long-run outcome. Short-run profits or losses can occur, and saying it’s true simply at equilibrium or only when demand is constant doesn’t capture the adjustment through entry and exit that drives profits to zero in the long run.