Question

In a competitive industry some firms earn positive economic profits while some earn zero economic profit in the long run because:

A. there exists free entry and exit of firms.
B. the firms have different cost structures.
C. the firms sell their output at different prices.
D. the industry supply curve is perfectly elastic.

Answer 1

Answer: Option B

Explanation: In simple words, competitive industry is the one in which both the consumer and the producer are price takers due to the high number of participants on both sides. No individual firm could control the price and the profit is totally dependent on the quantity sold.

However, the cost structure could be different of different firms and in the long run only those firms survives that have a reasonable profit margin on sales. The other firms earns nothing and ultimately leaves the industry.

Hence the correct option is B .