The following graph depicts the various cost curves for a representative competitive firm producing quantity Q1:

-Refer to the above graph to answer this question.If the price of the product is P1,what does the graph suggest?
A)The firm is making economic profits in the short run but not in the long run.
B)The firm is making economic profits in the long run but not in the short run.
C)The firm is making economic profits in both the short run and the long run.
D)The firm is not making economic profits in either the short run or the long run.

Question

The following graph depicts the various cost curves for a representative competitive firm producing quantity Q1:
 
-Refer to the above graph to answer this question.If the price of the product is P1,what does the graph suggest?
A)The firm is making economic profits in the short run but not in the long run. 
B)The firm is making economic profits in the long run but not in the short run. 
C)The firm is making economic profits in both the short run and the long run. 
D)The firm is not making economic profits in either the short run or the long run.

Quizplus · Accepted Answer

The graph suggests that at the price P1, the firm is producing at the quantity Q1, where the marginal cost curve intersects the marginal revenue curve. At this quantity, the firm's total revenue (P1 x Q1) is equal to its total cost (the area under the average total cost curve). Therefore, the firm is making zero economic profits in both the short run and the long run.

The Following Graph Depicts the Various Cost Curves for a Representative