Indicate whether is true or false and explain why .
a) A perfect competitive firm that incuring a loss should immediately cease operations .
b) Inthe long-run , firms operating in perfect competition and monopolistic competition will tend to earn normal profits .



A) True. This is mainly due to the adjustment of freedom to entry and exit the market. If looses occur, firms in the PC will exit the market.

b) False. Firms in the MC will earn super normal profit in the long run. Firms in the MC produce differentiated products and they compete using price and non-price techniques. One aspect of non-price technique is quality. MC firms will allocate money for production, quality improvement with hope that they can increase demand and enjoy super normal profit for longer period of time. As for PC firms, they only earn normal profit in the long run as normal profit is the amount that need to stay in business and this amount of profit is equal to the next best of alternative business.