Final answer:
Economic profits are maximized at the point where marginal revenues equal marginal costs. This principle ensures firms in perfectly competitive markets produce the optimal amount, maximizing profits or minimizing losses. In the long run, new competitors entering the market can drive economic profits to zero.The correct answer is option (c)
Step-by-step explanation:
Economic profits are maximized at the point at which marginal revenues equal marginal costs (MR = MC). This economic principle applies to perfectly competitive firms that continue to produce additional units as long as the revenue from selling an additional unit (marginal revenue) is greater than the cost of producing that unit (marginal cost). At the point where MR = MC, total profits are maximized because producing more would add more to costs than to revenues, and producing less would mean not making as much profit as possible since the additional revenue would be greater than the additional cost.
In a perfectly competitive market, the firm's price will be equal to its marginal revenue, and thus, the firm will continue producing until price no longer exceeds marginal cost. When the market price is above average cost at the profit-maximizing output, the firm realizes an economic profit. Conversely, if the market price is below average cost, the firm incurs losses. Over time, positive economic profits attract new competitors, which increases supply, lowers the market price, and reduces profits. In the long run, the entry of new firms into the market drives economic profits to zero; this is known as the zero-profit equilibrium, where firms just cover their opportunity costs.