Question

Which of the following statements is TRUE? Select one:

a. If a profit-maximizing firm in a perfectly competitive market is incurring an economic loss, then it must be producing at a level of output where price is greater than average total cost.
b. When firms in a perfectly competitive market incur economic losses, some will exit in the long run, thereby shifting the industry supply curve rightward.
c. The presence of positive economic profit in a perfectly competitive market is consistent with the characteristics of a long-run competitive equilibrium.
d. If a profit-maximizing firm in a perfectly competitive market is making an economic profit, then it must be producing at a level of output where price is greater than average total cost.

Answer 1

In a perfectly competitive market, firms incurring economic loss will produce at a level where price is greater than average total cost, while firms with positive economic profit are not consistent with long-run equilibrium.

Step-by-step explanation:

In a perfectly competitive market, if a profit-maximizing firm is incurring an economic loss, it must be producing at a level of output where price is greater than average total cost. This is because the firm will continue to produce as long as price is greater than average variable cost in order to minimize losses. However, if price is below average total cost, the firm will shut down in the long run.

When firms in a perfectly competitive market incur economic losses, some will exit in the long run. This is because firms that are making losses will have to shut down in order to minimize their losses. When these firms exit the market, the industry supply curve will shift rightward.

The presence of positive economic profit in a perfectly competitive market is not consistent with the characteristics of a long-run competitive equilibrium. In the long run, perfectly competitive markets will reach a state of zero economic profit, where price is equal to average total cost.