Question

We have the following information about a profit-maximizing firm in a perfectly competitive market: Price =...

We have the following information about a profit-maximizing firm in a perfectly competitive market:

Price = 95
Quantity = 1000
Average Total Cost (ATC) = 95
Average Variable Cost (AVC) = 83

Which of the following is correct?

The firm is making a loss

The firm is making an economic profit

The firm should shut down

The firm should keep operating
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Homework Answers

Answer #1

The shut-down condition of the perfectly competitive firm is

P=MC=Minimum of AVC

The profit-maximizing condition of perfectly competitive firm is

P=MC

A profit-maximizing firm in a perfectly competitive market is in a following condition;

Price = 95
Quantity = 1000
Average Total Cost (ATC) = 95
Average Variable Cost (AVC) = 83

Economic profit=(P-ATC)Q

=(95-95)*1000

=$0

Since firm is making zero economic profit but price is greater than AVC at Q=1000 units. Hence firm should keep operating.

Hence option fourth is the correct answer.

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