Here is the analysis for the given question:
This is a question about the long-run equilibrium for a firm (Crest) in a competitive market for a product (toothpaste).
The key graphs needed to analyze this are:
- Demand curve - Shows the relationship between quantity demanded and price. Downward sloping due to law of demand.
- Marginal revenue (MR) curve - For a perfectly competitive firm, the MR curve is equivalent to the demand curve since the firm is a price taker.
- Average total cost (ATC) curve - Shows the average total cost per unit at different levels of output. U-shaped due to economies and diseconomies of scale.
- Marginal cost (MC) curve - Shows the additional cost of producing one more unit. Intersects ATC curve at lowest point.
In long-run equilibrium for a perfectly competitive firm, the following conditions must hold:
- Profit maximization: MR = MC
- Zero economic profit: Price = minimum ATC
Of the two graphs provided, Graph A satisfies these equilibrium conditions.
The MR and demand curves overlap, MR=MC at the profit maximizing quantity, and the price line is tangent to the minimum point on the ATC curve, indicating zero economic profit.
Therefore, Graph A accurately reflects the demand, MR, ATC, and MC curves for Crest in long-run equilibrium.
The key is recognizing the relationships that must exist between these curves at the optimal equilibrium output and price. Graph A illustrates these requirements correctly.