TutorOn by Sanath Withanage

Question:

At the current level of output of a perfectly competitive firm, the marginal cost is Rs. 80. The average variable cost is Rs. 50. The average fixed cost is Rs. 30 and the product price is Rs. 80. Which of the following statements is true for this firm?
(1) Economic profit is zero because marginal revenue equals marginal cost.
(2) Economic profit is negative because total revenue is less than total cost.
(3) Economic profit is positive because total revenue is greater than total cost.
(4) Economic profit is negative because price is greater than average variable cost.
(5) Economic profit is zero because price equals average total cost.

Correct Answer:

(5)

Answer Explanation:

First, calculate Average Total Cost (ATC): ATC = AVC + AFC = 50 + 30 = 80. Since the market Price (80) is exactly equal to the Average Total Cost (80), the firm is breaking even. Therefore, the firm’s economic profit is exactly zero.

Topic: Market Structures Year: 2018