With free entry and exit of firms in the market, the equilibrium price will be _________.

Equal to minimum average cost

The correct answer is Option 2: Equal to minimum average cost

• In a perfectly competitive market with free entry and exit of firms, firms will only stay in the market if they can earn at least normal profit (zero economic profit).
• This happens when Price = Minimum Average Cost (AC) in the long run.
• If the price were above minimum AC, firms would earn supernormal profits, attracting new firms, increasing supply, and pushing the price back down.
• If the price were below minimum AC, firms would incur losses, causing some to exit, reducing supply, and pushing the price back up.
• Eventually, the market stabilizes where price equals minimum average cost (AC).