Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The firm is making an economic profit greater than zero.
B
The firm is breaking even, with zero economic profit.
C
The firm is incurring an economic loss.
D
The firm cannot determine its economic profit without additional information.
Understanding the Answer
Let's break down why this is correct
Answer
In a competitive market, a firm maximizes its profit when it produces a quantity of goods where its marginal cost equals the market price. This means that the cost of producing one more unit of the product is exactly the same as the price that customers are willing to pay for that unit. When this happens, the firm is covering all its costs, including both fixed and variable costs, but it is not making any economic profit. For example, if a firm sells a product for $10 and its marginal cost to produce that product is also $10, then the firm is breaking even, meaning it earns no extra profit beyond covering its costs. Therefore, if the marginal cost equals the market price, the firm's economic profit is zero.
Detailed Explanation
When a firm's marginal cost equals the market price, it means the firm is covering all its costs. Other options are incorrect because Some might think that equal costs mean profit; It's a common mistake to think that equal costs mean losing money.
Key Concepts
marginal cost
economic profit
firm behavior.
Topic
Profit Maximization for Firms
Difficulty
hard level question
Cognitive Level
understand
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