Question

If a perfectly competitive firm has the situation where MR=MC=5 and ATC=3 with a Q* of 4

	a.	The firm has losses
	b.	The firm has an economic profit of 8
	c.	the firm has an accounting profit of 8
	d.	The firm has a profit of 12

Answer 1

A perfect competitive firm is a price taker because of which P is fixed and always charges price determined by a market.

MR = (dTR)/dQ = d(P*Q)/dQ = P(dQ/dQ) = P => P = MR = 5 (Note P is independent of quantity in a perfeect competitive market discussed above), where TR = Total revenue = P*Q, P = price, Q = quantity.

In order to maximize profit a perfect competitive produces that quantity where P = MR = MC and here P = MR = MC and thus it is profit maximizing output.

TC = Total Cost = ATC*Q

Profit = TR - TC = P*Q - ATC*Q

=> Profit = 5*4 - 3*4 = 8(Note this profit we consider is economic profit because we consider all cost including implicit cost)

Thus, he is earning an economic profit of $8  

Hence, the correct answer is (b) The firm has an economic profit of 8.