Scenario: There are two firms producing ballpoint pens in a perfectly competitive industry. The market price of one pen is $5. Firm A has a lower marginal cost than Firm B. The following graphs illustrate the marginal cost curves of both firms.

-Refer to the scenario above.The average total cost of Firm A when it produces 100 pens is $3,and the average total cost of Firm B when it produces 50 pens is $7.At these levels of production,which of the following statements is true?

Question

Scenario: There are two firms producing ballpoint pens in a perfectly competitive industry. The market price of one pen is $5. Firm A has a lower marginal cost than Firm B. The following graphs illustrate the marginal cost curves of both firms.
 
-Refer to the scenario above.The average total cost of Firm A when it produces 100 pens is $3,and the average total cost of Firm B when it produces 50 pens is $7.At these levels of production,which of the following statements is true?

Quizplus · Accepted Answer

For Firm A, producing 100 pens at an average total cost of $3 means that its total cost is $300. At a market price of $5 per pen, total revenue will be 100 pens x $5 = $500. Therefore, the profit for Firm A is $500 - $300 = $200. 
For Firm B, producing 50 pens at an average total cost of $7 means that its total cost is $350. At a market price of $5 per pen, total revenue will be 50 pens x $5 = $250. Therefore, the loss for Firm B is $350 - $250 = $100.

Thus, Firm A makes a profit while Firm B incurs a loss. Therefore, the correct choice is C.

Scenario: There Are Two Firms Producing Ballpoint Pens in a Perfectly