Figure 14-4
Suppose a firm operating in a competitive market has the following cost curves:
-Refer to Figure 14-4. The firm will earn positive economic profits if the price is i) P4.
Ii) P3.
Iii) P2.
Iv) P1.

Question

Figure 14-4
Suppose a firm operating in a competitive market has the following cost curves: 
-Refer to Figure 14-4. The firm will earn positive economic profits if the price is i) P4.
Ii) P3.
Iii) P2.
Iv) P1.

Quizplus · Accepted Answer

In competitive markets, firms will produce where marginal cost (MC) intersects the marginal revenue (MR) curve, which is also the market price.

At P1 and P2, the firm's marginal cost is higher than the market price, so it would not produce anything and earn negative economic profits.

At P3, the firm's marginal cost intersects the marginal revenue curve, but it only covers the average variable cost (AVC). This means that the firm would be earning zero economic profit, as it is covering all of its variable costs but not enough to cover its fixed costs.

At P4, the firm's marginal cost intersects the marginal revenue curve and covers both the AVC and the average total cost (ATC). This means that the firm would be earning positive economic profits, as it is covering all of its costs and making a profit. Therefore, the answer is i) only.

Figure 14-4 Suppose a Firm Operating in a Competitive Market Has the Has