Question

Which of the following statements is correct?

Select one or more:

1. When a firm’s marginal revenue equals its marginal costs, then its economic profits must be zero.

2. In the short run, a firm will experience diminishing marginal returns because firms have fixed factors of production.

3. A monopoly firm should always charge the highest possible price in order to earn the highest profits.

4. A firm's accounting profits will never be less than its economic profits.

5. A competitive firm should always choose to produce the level of output that corresponds to its minimum efficient scale.

Answer 1

Option 1, 2, 4 and 5

In a perfect competition, when MC equals MR, the profit is at is maximum indicating zero economic profit (considers both Explicit and implicit costs).

The marginal cost increases with the increase in output so the marginal returns would be diminishing with the increase in output in short run

Accounting profit considers only paid out expenses whereas economic profit considers both paid out and implicit costs

The competitive firm would be maximizing profit where ATC is at its minimum.