A perfectly competitive profit maximizing firm whose long run economic profit is exactly zero should expand production to try to earn a positive profit

Economics Dec 11, 2020

Expert Solution

In long run the firm earns zero economic profit and at that point , price= marginal cost= average cost. Average cost is also minimum corresponding to that point. But if the firm tries to expand the output the price will not change as the firm's share of supply is very small and it won't have any impact on the market price but the average cost will increase. So now price will be less than average cost and the firm will be making loss.

Profit = (price - average cost) × quantity

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