Which of the following statements about a competitive firm is correct?
A) To maximize profits, a competitive firm should produce the output level at which total revenue is greatest.
B) In long-run equilibrium, a competitive firm will produce at the point of minimum average costs.
C) A competitive firm will produce in the short run so long as total receipts are sufficient to cover total fixed costs.
D) A competitive firm will close down in the short run whenever price is less than the minimum attainable average total cost.

Question

Quizplus · Accepted Answer

In long-run equilibrium, a competitive firm will produce at the point of minimum average costs because new firms will enter the market if there are profits to be made, increasing market supply and driving down prices until firms are earning only normal profits. This process will continue until firms are producing at the lowest possible cost of production. A is incorrect because a competitive firm should produce the output level at which marginal revenue equals marginal cost to maximize profits. C is incorrect because a competitive firm will produce in the short run as long as price covers variable costs, not just fixed costs. D is incorrect because a competitive firm will continue to produce as long as price covers variable costs, even if it is not covering fixed costs. A firm should only shut down in the short run if total revenue cannot cover variable costs.

Which of the Following Statements About a Competitive Firm Is