If a graph of a perfectly competitive firm shows that the MR = MC point occurs where MR is above AVC but below ATC,
A) the firm is earning negative profit, and will shut down rather than produce that level of output.
B) the firm is earning negative profit, but will continue to produce where MR = MC in the short run.
C) the firm is still earning positive profit, as long as variable costs are covered.
D) the firm is covering explicit, but not implicit, costs.
E) the firm can cover all of fixed costs but only a portion of variable costs.

Question

Quizplus · Accepted Answer

If the MR = MC point occurs where MR is above AVC but below ATC, the firm is earning negative profit, but since the revenue being generated at that level of output is still covering the variable costs and contributing to the fixed costs, the firm will continue to produce in the short run. In the long run, though, the firm may exit the market if it continues to earn negative profit.

If a Graph of a Perfectly Competitive Firm Shows That