Final answer:
A perfectly competitive firm earns an economic profit when the market price (P) is greater than the average variable cost (AVC), which indicates that the firm is not only covering its variable costs but also contributing to its fixed costs and potentially earning a profit overall.
Step-by-step explanation:
A perfectly competitive firm is definitely earning an economic profit when P > AVC (option C). We know this because, in perfect competition, firms set output where marginal cost (MC) equals marginal revenue, which is also the market price (P). Profits are highest where P exceeds average variable cost (AVC), and total revenues exceed total costs by the most significant amount. If the market price is above average total cost (ATC) at the profit-maximizing quantity, the firm earns an economic profit. Conversely, if the market price is below ATC, the firm incurs losses. Since P > AVC indicates a firm is covering its variable costs and contributing to fixed costs, it is a condition for earning an economic profit, assuming P also exceeds ATC.