Path:p QUESTION 3 Words 0 If a graph of a perfectly competitive firm shows that
ID: 1161559 • Letter: P
Question
Path:p QUESTION 3 Words 0 If a graph of a perfectly competitive firm shows that the P MC point occurs where MR is A) the firm is earning negative profit, and will shut down rather than produce that level of output B) the firm is earning negative profit, but will continue to produce where P MC in the short run C) the firm is still eaning positive profit, as long as variable costs are covered D) the firm is covering explicit, but not implicit, costs E) the firm can cover all of fixed costs but only a portion of variable costs above AVC but below ATCExplanation / Answer
B is correct
In perfect competition, equilibrium is reached at P=MC=MR.
Profit= (P-ATC)Q
We are given that MR or P is lower than ATC which implies profits are negative.
But we are also given that P or MR>AVC which means it is able to cover variable cost but not fixed cost.
Since fixed cost does not depend on output, firm will incur fixed cost even if operates or shut down. So it will continue to produce in short run as by producing it is able to decrease negative profits as price is above AVC.
Explicit cost is the cost actually incurred and because ATC >P it is not able to cover explicit cost.