3. The profit-maximizing condition for a perfectly competitive firm is B. MR AVC

Question

3. The profit-maximizing condition for a perfectly competitive firm is B. MR AVC D. P AVC. 4. If a perfectly competitive firm finds that price is less than average variable cost it should A. not adjust output if marginal cost equals price. B. shut down immediately. C. increase output until price equals marginal cost. MC D. decrease output until price equals marginal cost. ATC 5. Refer to the graph on the right The perfectly competitive firm depicted is currently: AVC A. earning positive economic profit B. earning zero economic profit C. incurring a loss, but the loss is smaller than the firm's total fixed cost D. incurring a loss that is larger than total fixed cost, so the firm should shut down

Explanation / Answer

3.) C.) This is the profit maximizing condition because if P>MC, the firm would make more profit by producing more of the good, and if P<MC, the firm is losing money on each good produced, and would make more of a profit by producing less of the good.

4.) B.) This is because Average Variable Cost is the average of the marginal costs. Since price is less than Average Variable Cost, the firm is losing money by selling the products, and would lose less by shutting down immediately.

5.) B.) The quantity produced is where MC=P, as was explained in answer #3. If you look at the AVC and ATC at that quantity, you will see that both lines are under the price of the good, therefore, the firm is earning a positive accounting profit. HOWEVER, that does not matter. The question states that the market is perfectly competitive. This is a law of economics, in a perfectly competitive market, all firms have a zero economic profit (which is accounting profit less the opportunity cost of doing something else). Therefore, although the accounting profit is positive, the economic profit is zero.

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