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Question
Macroeconomics
Posted 6 months ago

If a firm in a perfectly competitive market is earning normal economic profits, which of the following is true?

Choose 1 answer:
(A) P=ATC=MC=MRP=A T C=M C=M R
(B) P>ATCP>A T C and MC=MRM C=M R
(C) P<ATCP<A T C and MC=MRM C=M R
(D) P<MRP<M R and MC>ATCM C>A T C
(E) P>MR,P>ATCP>M R, P>A T C, and MC=MRM C=M R
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Answer from Sia
Posted 6 months ago
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=ATCP = 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=MRMC = 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=ATCP = ATC and MC=MRMC = MR
Answer
(A) P=ATC=MC=MRP = 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.

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