Question : Assertion: In a perfectly competitive market, firms can freely enter or exit the industry.
Reason: Free entry and exit ensure that firms earn zero economic profit in the long run.
Option 1: Both the assertion and reason are true, and the reason is a correct explanation of the assertion.
Option 2: Both the assertion and reason are true, but the reason is not a correct explanation of the assertion.
Option 3: The assertion is true, but the reason is false.
Option 4: The assertion is false, but the reason is true.
Correct Answer: Both the assertion and reason are true, and the reason is a correct explanation of the assertion.
Solution : The correct answer is (a) Both the assertion and reason are true, and the reason is a correct explanation of the assertion.
In a perfectly competitive market, the assertion that firms can freely enter or exit the industry is true. Perfect competition is characterized by low barriers to entry and exit, meaning that new firms can easily enter the market if they perceive an opportunity for profit, and existing firms can exit if they are unable to cover their costs or earn a profit. This free entry and exit ensure that there are no artificial restrictions on the number of firms operating in the market.
The reason provided is a correct explanation of the assertion. In a perfectly competitive market, when firms can freely enter or exit the industry, any economic profit earned in the short run will attract new firms to enter the market. This increased competition will drive down prices, resulting in lower profits for all firms. In the long run, this process will continue until firms earn only normal profits, which are just enough to cover their opportunity costs. Therefore, firms in a perfectly competitive market earn zero economic profit in the long run.
Hence, both the assertion and reason are true, and the reason is a correct explanation of the assertion.
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