Question

The graph above shows the short-run cost curves of a firm in a perfectly competitive market. Which of the following are true at the firm's profit-maximizing output level?

Price exceeds average total cost.

Economic profits are zero.

Marginal cost equals average total cost.

New firms are likely to enter the market in the long run.


I and II only


a

I and III only


b

I and IV only


c

II, III, and IV only


d

I, II, III, and IV

Answer 1

Answer: I and IV only (choice c).

Reason: In perfect competition the firm produces where P = MR = MC. The graph shows P > ATC at that output, so the firm earns positive economic profits (II is false). MC equals ATC only at the minimum of the ATC curve, which need not coincide with the profit-maximizing output (III is not necessarily true). Positive economic profits (P > ATC) will attract entry in the long run (IV is true).