What is the largest possible loss that is consistent with a firm producing in a perfectly competitive market in long-run competitive equilibrium?
A) an amount equal to price minus average variable cost
B) an amount equal to total variable
C) zero
D) an amount equal to total fixed cost

Question

Quizplus · Accepted Answer

In a long-run competitive equilibrium, firms are producing at their minimum efficient scale with zero economic profits. This means that their total revenue (which equals price times quantity) is just enough to cover all of their costs, including both variable and fixed costs. Therefore, the largest possible loss that is consistent with this equilibrium is zero. Option A is incorrect because in a perfectly competitive market, firms will not produce if the price is below average variable cost. Option B is incorrect because total variable cost could still be covered by total revenue, resulting in a break-even or profitable outcome. Option D is incorrect because fixed costs do not affect a firm's decision to produce in the short or long-run.

What Is the Largest Possible Loss That Is Consistent with a Firm