Question

If a perfectly competitive firm is producing and selling that level of output such that P = ATC, we can conclude that:

1) The firm is earning economic profit
2) The firm is earning normal profit
3) The firm is incurring losses
4) The firm is maximizing its profit

Answer 1

A perfectly competitive firm earns economic profit when the market price is greater than average total cost, earns normal profit when the market price is equal to average total cost, and incurs losses when the market price is less than average total cost.

Step-by-step explanation:

A perfectly competitive firm earns economic profit when the market price, represented by P, is greater than average total cost (ATC). When the market price is equal to ATC, the firm earns normal profit. However, if the market price is less than ATC, the firm incurs losses.

For example, if a firm's ATC is $10 and the market price is $15, the firm would earn economic profit. If the market price is exactly $10, the firm would earn normal profit. But if the market price falls to $5, the firm would incur losses.