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process ends when all firms remaining in the market earn zero economic profits. The result is a

contraction in the output produced in the market.

9. Perfect competition is considered to be “perfect” because both allocative and productive efficiency are met

at the same time in a long-run equilibrium. If a market structure results in long-run equilibrium that does

not minimize average total costs and/or does not charge a price equal to marginal cost, then either

allocative or productive (or both) efficiencies are not met, and therefore the market cannot be labeled

“perfect.”

10. Think of the market price as representing the gain to society from a purchase, since it represents what

someone is willing to pay. Think of the marginal cost as representing the cost to society from making the

last unit of a good. If P > MC, then the benefits from producing more of a good exceed the costs, and society
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