TutorOn by Sanath Withanage

Question:

At a competitive firm’s current level of output, the marginal cost is Rs. 100, the average variable cost is Rs. 60, the average fixed cost is Rs. 40 and the product price is Rs. 100 per unit. Which of the following statement is true for this firm?
(1) Economic profits are zero because price equals average total cost.
(2) Economic profits are negative because total revenue is less than total cost.
(3) Economic profits are positive because total revenue is greater than total cost.
(4) Economic profits are negative because price is greater than average variable cost.
(5) Economic profits are zero because marginal revenue equals marginal cost.

Correct Answer:

(1)

Answer Explanation:

Average Total Cost (ATC) = Average Variable Cost (AVC) + Average Fixed Cost (AFC). Therefore, ATC = 60 + 40 = 100. Since the Price (100) exactly equals the ATC (100), the firm is breaking even, meaning economic profits are zero.

Topic: Market Structures Year: 2022