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Question
Under Perfect Competition, a firm will enjoy normal profit in the long run even if it enjoys supernormal profit in the short run. Explain.
Solution
- There are no constraints on the firm's ability to enter or exist. If existing market enterprises are making unusual profits, new firms will be encouraged to produce the product and profit.
- This will increase the industry's supply.
- This lowers the price and earnings.
- The arrival of new enterprises. Will continue until the firms begin to produce formal profits.
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