Revenue and cost (dollars per unit) MC 50 40 30 20 10 ATC AVC 10 20 30 40 50 Out

Question

Revenue and cost (dollars per unit) MC 50 40 30 20 10 ATC AVC 10 20 30 40 50 Output (units per day) The above figure shows a perfectly competitive firm. If the market price is more than $20 per unit, the firm a. will stay open to produce and will make zero economic profit. O b. might shut down but more information is needed about the fixed cost. c. will stay open to produce and will incur an economic loss. d, will stay open to produce and will make an economic profit. e, will definitely shut down to minimize its losses.

Explanation / Answer

1) Option d - firm will stay open and will make an economic profit (P = MC > ATC)

2) Option a - firm will stay open and will make zero economic profit (P = MC = ATC)

3) Option e - firm is making zero economic profit (P = MC = ATC)

4) Option e - firm might shutdown as P < ATC but more information is required about AVC

5) Option b - Total cost = Fixed cost + Variable cost

6) Option c - All costs are variable in the long run

7) Option d - economies of scale (ATC falls as output increases)

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