If a graph of a perfectly competitive firm shows that the point occurs where MR is above AVC but below ATC,
A) the firm is earning negative profit, and will shut down rather than produce that level of output.
B) the firm is earning negative profit, but will continue to produce where in the short run.
C) the firm is still earning positive profit, as long as variable costs are covered.
D) the firm is covering explicit, but not implicit, costs.
E) the firm can cover all of fixed costs but only a portion of variable costs.

Question

If a graph of a perfectly competitive firm shows that the  point occurs where MR is above AVC but below ATC,
A) the firm is earning negative profit, and will shut down rather than produce that level of output. 
B) the firm is earning negative profit, but will continue to produce where in the short run. 
C) the firm is still earning positive profit, as long as variable costs are covered. 
D) the firm is covering explicit, but not implicit, costs. 
E) the firm can cover all of fixed costs but only a portion of variable costs.

Quizplus · Accepted Answer

The 11eab6a8_3abb_363c_9bd3_978dba4a1c0f_TB3095_11 point occurs where MR equals MC, which is the profit-maximizing level of output. If MR is above AVC but below ATC, the firm is still covering its variable costs but not its fixed costs. This means that the firm is earning negative profit, but it will continue to produce in the short run as long as it can cover its variable costs. Therefore, option B is the best choice.

If a Graph of a Perfectly Competitive Firm Shows That