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Question
Microeconomics
Posted 2 months ago

If profit is as high as possible and normal economic profits are being earned, which of the following is true?

Choose 1 answer:
(A) P=ATC(Q)P=A T C(Q) and MR(Q)=MC(Q)M R(Q)=M C(Q)
(B) P>ATC(Q)P>A T C(Q) and MR(Q)>MC(Q)M R(Q)>M C(Q)
(C) P<ATC(Q)P<A T C(Q) and MR(Q)<MC(Q)M R(Q)<M C(Q)
(D) P>ATC(Q)P>A T C(Q) and MR(Q)=MC(Q)M R(Q)=M C(Q)
(E) P=ATC(Q)P=A T C(Q) and MR(Q)>MC(Q)M R(Q)>M C(Q)
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Answer from Sia
Posted 2 months ago
Solution
a
Definition of Normal Economic Profits: Normal economic profits occur when total revenue equals total costs, including both explicit and implicit costs. This means the firm is covering all its opportunity costs and earning zero economic profit
b
Condition for Profit Maximization: For a firm to maximize profit, marginal revenue (MR) must equal marginal cost (MC). This is the point where the cost of producing an additional unit equals the revenue gained from selling that unit
c
Relationship Between Price and Average Total Cost: When a firm is earning normal economic profits, the price (P) must equal the average total cost (ATC). This ensures that the firm is covering all its costs, including opportunity costs, but not making any economic profit
d
Combining Conditions: Therefore, if a firm is earning normal economic profits and maximizing profit, the conditions P=ATC(Q)P = ATC(Q) and MR(Q)=MC(Q)MR(Q) = MC(Q) must both be true
Answer
(A) P=ATC(Q)P=A T C(Q) and MR(Q)=MC(Q)M R(Q)=M C(Q)
Key Concept
Normal Economic Profits and Profit Maximization
Explanation
When a firm is earning normal economic profits, it means that the price equals the average total cost. Additionally, for profit maximization, marginal revenue must equal marginal cost. Therefore, the correct answer is (A) P=ATC(Q)P=A T C(Q) and MR(Q)=MC(Q)M R(Q)=M C(Q).

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