In the long run, a firm in a perfectly competitive market earns:
Options
ANormal profit
BSupernormal profit
CLoss
DNone of the above
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Price Determination in Different MarketsPYQ - Dec 2020Question 66 of 20
All Questions Correct Answer
✅ Option a — Normal profit
All Options:
- ANormal profit
- BSupernormal profit
- CLoss
- DNone of the above
Detailed Solution & Explanation
In a perfectly competitive market, firms have no control over the market price of their product. The market price is determined by the intersection of the market demand and supply curves.
• The firm's goal is to maximize profits, which occurs when marginal revenue equals marginal cost.
• In the long run, firms can enter or exit the market freely, which leads to the elimination of supernormal profits.
• As firms enter the market, the market supply curve shifts to the right, causing the market price to fall, and as firms exit the market, the market supply curve shifts to the left, causing the market price to rise.
• This process continues until the market reaches equilibrium, where the price equals the firm's average total cost, resulting in normal profit.
The correct answer is normal profit because it is the profit that is just enough to keep the firm in business, covering all costs, including the opportunity cost of the entrepreneur's time and capital.
• Supernormal profit is incorrect because it is not sustainable in the long run due to the free entry and exit of firms in a perfectly competitive market.
• Loss is also incorrect because firms would exit the market if they were consistently making losses, rather than continuing to operate at a loss.
About This Chapter: Price Determination
Paper
Paper 4: Business Economics
Weightage
15%
Key Topics
Perfect Competition, Monopoly, Monopolistic, Oligopoly
This high-weightage chapter covers all four market structures: Perfect Competition, Monopoly, Monopolistic Competition, and Oligopoly. Students learn how price and output are determined under each structure, along with key concepts like Price Discrimination, Kinked Demand Curve, and the conditions of equilibrium (MR = MC).
View Official ICAI SyllabusExam Strategy Tip
This chapter carries the highest weightage (~15%). Focus on features of each market, the shape of AR and MR curves, and understand why firms in Perfect Competition are 'Price Takers' while Monopolists are 'Price Makers'.
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More Questions from Price Determination in Different Markets
Under which of the following forms of market structure does a firm have no control over the price of its product?
A firm encounters its "shutdown point" when:
Kinked demand curve hypothesis is designed to explain in context of oligopoly
Which of the following is not a characteristic of a "Price Taker"?
Price discrimination will be profitable only if the elasticity of demand in different markets is:
Which of the following is not an essential condition of pure competition?
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