Question

Explain the three possible profit-maximizing positions of perfectly competitive firms in a short run.

Answer 1

a)  When Price is equal to marginal cost(MC) and price is less than Average Total Cost(ATC) but price is greater than average variable cost (AVC).

b) When price is equal to marginal cost and marginal cost is equal to Average Total Cost. In this case the costs is equal to revenue.

c) When price (P) is equal to marginal cost (MC) and price is greater than the Average Total Cost (AVC). The firm is earning economic profits because P>ATC