If a firm in a perfectly competitive market is earning normal economic profits, which of the following is true? Choose 1 answer: (A) $P=A T C=M C=M R$ (B) $PA T C$ and $M C=M R$ (C) $PA T C$ (E) $PM R, PA T C$, and $M C=M R$

Question

If a firm in a perfectly competitive market is earning normal economic profits, which of the following is true? Choose 1 answer: (A) $P=A T C=M C=M R$ (B) $P>A T C$ and $M C=M R$ (C) $PA T C$ (E) $P>M R, P>A T C$, and $M C=M R$

Accepted Answer

∻Solution∻ ‖ a ⋮ Normal Economic Profits: In a perfectly competitive market, normal economic profits occur when total revenue equals total costs, including opportunity costs. This implies that the firm is covering all its costs, including a normal return on investment. ‖ ‖ b ⋮ Price and Average Total Cost Relationship: When a firm is earning normal economic profits, price equals average total cost ($P = ATC$), because the firm is covering all its costs, including the opportunity cost of capital. ‖ ‖ c ⋮ Marginal Cost and Marginal Revenue Relationship: In a perfectly competitive market, a firm maximizes profit by producing up to the point where marginal cost equals marginal revenue ($MC = MR$). This is the profit-maximizing rule for a perfectly competitive firm. ‖ ‖ d ⋮ Correct Answer Choice: Combining the information from steps b and c, the correct answer choice must show that $P = ATC$ and $MC = MR$. ‖ ∻Answer∻ ⚹ (A) $P = ATC = MC = MR$ ⚹ ∻Key Concept∻ ⚹ Normal Economic Profits in Perfect Competition ⚹ ∻Explanation∻ ⚹ In a perfectly competitive market, a firm earns normal economic profits when the price is equal to the average total cost and the marginal cost is equal to the marginal revenue. ⚹◊What is the relationship between price, average total cost, marginal cost, and marginal revenue in a perfectly competitive market when a firm is earning normal economic profits?⍭ Generate me a similar question◊

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