In the short run, a perfectly competitive firm earning negative economic profit:
A) is on the downward-sloping portion of its AVC.
B) is at the minimum of its AVC.
C) is on the upward-sloping portion of its AVC.
D) is not operating on its AVC.
E) can be at any point on its AVC.

Question

Quizplus · Accepted Answer

In the short run, a perfectly competitive firm earning negative economic profit will continue to produce as long as it can cover its variable costs. This means that it will produce where the marginal cost intersects with the average variable cost (AVC) curve. Since the firm is earning negative economic profit, the price it receives for its product is below its average total cost (ATC) curve. Therefore, the firm is not operating at its minimum efficient scale, and its AVC curve is upward-sloping. Thus, the correct choice is C, as the firm must be on the upward-sloping portion of its AVC.

In the Short Run, a Perfectly Competitive Firm Earning Negative