Chapter 58, Problem 7MCQ

To determine

The correct option for given situation where P = ATC.

Answer to Problem 7MCQ

Option b is correct answer.

Explanation of Solution

Explanation for correct option:

b.

The firm that produces the quantity at which market price and average total cost is equal then in such condition, the firm attains break-even level as there no profit earned or no losses incurred. Therefore, option b is correct.

Explanation for incorrect options:

a.

The firm attains break-even if market price is equal to the average total cost. The firm will incur losses when P < ATC. Therefore, option a is incorrect.

c.

The firm’s profit and losses can be determined by comparing the market price and the average total cost. Demand curve is beyond its consideration. Downward sloping demand curve may occur due to various reasons where high price is one of them. Therefore, option c is incorrect.

d.

The firm will maximize its profit when marginal cost is minimum. The firm earns profit if P > ATC. Therefore, option d is incorrect.

e.

Firm will not earn profit if its market price is equal to the average total cost. To earn profit, firm should sell their product at price above average total cost. Therefore, option e is incorrect.

Economics Concept Introduction

Average total cost: Average total cost of production per unit is comprised of two cost components that is average fixed cost and average variable cost. In short-run, fixed cost of the production remains similar.