A perfectly competitive firm earns a profit when price is
A)equal to minimum average total cost.
B)above minimum average total cost.
C)equal to minimum average variable cost.
D)equal to minimum average fixed cost.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms are price takers, i.e. they have no control over the price of the product they sell. Therefore, a firm can maximize its profit by producing the quantity of output where the marginal cost (MC) equals the market price (P). If the market price is above the minimum average total cost (ATC), the firm is earning a profit because its revenue (P x Q) is higher than its total cost (ATC x Q). If the market price is equal to ATC, the firm is earning only normal profit or zero economic profit, which means it is covering all its costs including an opportunity cost of capital. If the market price is below ATC, the firm is earning a loss and should consider shutting down production in the short run. Therefore, the only choice that fits the condition for earning a profit is B.

A Perfectly Competitive Firm Earns a Profit When Price Is