If the price-taker firm in Figure 9-16 is producing at the profit

If the price-taker firm in Figure 9-16 is producing at the profit maximizing rate of output, then which of the following are true?

Group of answer choices:

The firm is making zero economic profits and the industry is in long-run equilibrium

The firm is making a positive economic profit and new firms will enter the industry in the long-run

The firmis making an economic loss and firms will exit the industry in the long run

The firm is making a positive economic profit, but high barriers to entry will keep potential competitors out of the market so it can continue to make positive economic profits in the long-run

The firm is making an economic loss and firms will exit the industry in the long run.

Reasons:

• Firm’s profit is maximized when it produces and sells at the level where marginal cost (MC) is equals to marginal revenue (MR).
• In the above diagram, we can see the point where marginal revenue is equals to marginal cost, firm is not able to recover its average total cost. Price is $4 and ATC is $4.90.
• The price (P = MR = AR)  is less than ATC i.e. here the firm is having a loss.
• the firm will continue to operate in the market till it is able to recover its average variable cost (i.e. P > AVC).
  But in the long run if it is not able to recover even its average variable cost it will exit the market.

 

Other Group of answer choices are not correct for given situation.

Option 1

The firm is making zero economic profits When its Price = ATC or Total Revenue = Total Cost and the industry is in long-run equilibrium. But it is not the case here.

Option 2
The firm is making a positive economic profit is the case When Price > ATC and this attracts new firms in the market in the long-run.
But this is not the case here.

Option 4
This option belongs to oligopoly market, and firm is price maker and also there is high barrier to entry.
The diagram above belongs to perfect competition market and hence given option is not applicable.

Thus only option 3 is applicable.