Asked by Christian Mirakaj on May 01, 2024
Verified
Assume a purely competitive firm is maximizing profit at some output at which long-run average total cost is at a minimum.Then:
A) the firm is earning an economic profit.
B) there is no tendency for the firm's industry to expand or contract.
C) allocative but not productive efficiency is being achieved.
D) other firms will enter this industry.
Allocative Efficiency
A state of the economy in which production represents consumer preferences; in other words, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
Long-Run
A period of time in economics during which all factors of production and costs are variable, allowing for complete adjustment to changes.
Average Total Cost
The sum of average variable costs and average fixed costs, or simply the total cost divided by the quantity of output produced.
- Differentiate between short-run and long-run decision-making in purely competitive markets.
- Comprehend the relationship between price, average total cost, and marginal cost in long-run equilibrium.
Verified Answer
ZK
Zybrea KnightMay 04, 2024
Final Answer :
B
Explanation :
If a purely competitive firm is maximizing profit at the output where long-run average total cost is at a minimum, then it is producing at its efficient scale and achieving productive efficiency. This means that it is producing at the minimum average total cost for the given level of output. In a purely competitive market, this would also mean that the price is equal to the minimum average total cost, and the firm is earning zero economic profit. There is no tendency for the firm's industry to expand or contract because there are no economic profits to attract or repel entry or exit. Allocative efficiency is also being achieved because the price is equal to the marginal cost.
Learning Objectives
- Differentiate between short-run and long-run decision-making in purely competitive markets.
- Comprehend the relationship between price, average total cost, and marginal cost in long-run equilibrium.