Consider the following cost curves for two perfectly competitive firms, A and B. FIGURE 9- 4
-Refer to Figure 9- 4. Firms A and B are in the same industry. Choose the statement that best describes the situation facing the two firms.
A) Firm A and Firm B are both suffering economic losses and will soon exit the industry.
B) Firm A is making losses but remains producing as long as price falls no further; Firm B is producing at lower cost and is earning economic profits.
C) Firm A and Firm B are both earning positive economic profits; new firms will likely enter the industry.
D) Firm A is suffering losses and will be shut down immediately; Firm B will be shut down if the price falls any further.

Question

Consider the following cost curves for two perfectly competitive firms, A and B.  FIGURE 9- 4
-Refer to Figure 9- 4. Firms A and B are in the same industry. Choose the statement that best describes the situation facing the two firms.
A) Firm A and Firm B are both suffering economic losses and will soon exit the industry. 
B) Firm A is making losses but remains producing as long as price falls no further; Firm B is producing at lower cost and is earning economic profits. 
C) Firm A and Firm B are both earning positive economic profits; new firms will likely enter the industry. 
D) Firm A is suffering losses and will be shut down immediately; Firm B will be shut down if the price falls any further.

Quizplus · Accepted Answer

Both firms are producing at a quantity where marginal cost equals marginal revenue (MC=MR), which is the profit-maximizing output level for a perfectly competitive firm. However, the price (P) is below average total cost (ATC) for Firm A but above ATC for Firm B. Therefore, Firm A is making losses while Firm B is earning economic profits. Firm A may continue producing in the short run as long as price remains above its average variable cost (AVC), but it will eventually exit the industry in the long run. Firm B will likely continue to produce and attract new firms to the industry, leading to a shift in the supply curve and a decrease in price.

Consider the Following Cost Curves for Two Perfectly Competitive Firms