In the short run, a purely competitive firm will earn a normal profit when
A) P = AVC.
B) P MC.
C) that firm's MR = market equilibrium price.
D) P = ATC.

Question

In the short run, a purely competitive firm will earn a normal profit when
A) P = AVC.
B) P > MC.
C) that firm's MR = market equilibrium price.
D) P = ATC.

Quizplus · Accepted Answer

In the short run, a purely competitive firm will earn normal profit when it produces at the point where P = ATC. At this point, the price equals the total cost per unit of production, including normal profit. If the price is only equal to the AVC (option A), the firm will shut down as it cannot even cover its variable costs in the short run. If the price exceeds the marginal cost (option B), the firm will continue to produce as long as the price is above the AVC but will earn supernormal profits. Option C is incorrect as MR may not be equal to the market equilibrium price for a competitive firm.

In the Short Run, a Purely Competitive Firm Will Earn