TutorOn by Sanath Withanage

Question:

A perfectly competitive firm will earn zero economic profit in the short-run when
(1) price equals marginal cost.
(2) total revenue equals total variable cost.
(3) marginal cost equals average variable cost.
(4) marginal revenue equals average fixed cost.
(5) price equals average total cost.

Correct Answer:

(5)

Answer Explanation:

Economic profit is calculated as Total Revenue minus Total Economic Cost. For a single unit, it is Price minus Average Total Cost (ATC). If the market Price exactly equals the firm’s Average Total Cost, the firm covers all explicit and implicit costs but makes no surplus, resulting in exactly zero economic profit (a “normal profit”).

Topic: Firm Theory Year: 2024